diff --git a/appveyor.yml b/appveyor.yml
index 68bf1bc94f..3b817395ae 100644
--- a/appveyor.yml
+++ b/appveyor.yml
@@ -23,4 +23,4 @@ install:
   - cmd: pip install .[test]
 
 test_script:
-  - nosetests --exclude-dir notebook\terminal -v notebook
+  - nosetests  -v notebook
diff --git a/notebook/notebookapp.py b/notebook/notebookapp.py
index 4baf4f256a..c8e204fb97 100755
--- a/notebook/notebookapp.py
+++ b/notebook/notebookapp.py
@@ -1328,8 +1328,7 @@ def init_terminals(self):
             initialize(self.web_app, self.notebook_dir, self.connection_url, self.terminado_settings)
             self.web_app.settings['terminals_available'] = True
         except ImportError as e:
-            log = self.log.debug if sys.platform == 'win32' else self.log.warning
-            log(_("Terminals not available (error was %s)"), e)
+            self.log.warning(_("Terminals not available (error was %s)"), e)
 
     def init_signal(self):
         if not sys.platform.startswith('win') and sys.stdin and sys.stdin.isatty():
diff --git a/notebook/terminal/__init__.py b/notebook/terminal/__init__.py
index 90df830731..e165ef7471 100644
--- a/notebook/terminal/__init__.py
+++ b/notebook/terminal/__init__.py
@@ -3,9 +3,10 @@
 import terminado
 from ..utils import check_version
 
-if not check_version(terminado.__version__, '0.3.3'):
-    raise ImportError("terminado >= 0.3.3 required, found %s" % terminado.__version__)
+if not check_version(terminado.__version__, '0.8.1'):
+    raise ImportError("terminado >= 0.8.1 required, found %s" % terminado.__version__)
 
+from ipython_genutils.py3compat import which
 from terminado import NamedTermManager
 from tornado.log import app_log
 from notebook.utils import url_path_join as ujoin
@@ -13,7 +14,12 @@
 from . import api_handlers
 
 def initialize(webapp, notebook_dir, connection_url, settings):
-    shell = settings.get('shell_command', [os.environ.get('SHELL') or 'sh'])
+    default_shell = which('sh')
+    if not default_shell and os.name == 'nt':
+        default_shell = 'powershell.exe'
+    shell = settings.get('shell_command',
+        [os.environ.get('SHELL') or default_shell]
+    )
     terminal_manager = webapp.settings['terminal_manager'] = NamedTermManager(
         shell_command=shell,
         extra_env={'JUPYTER_SERVER_ROOT': notebook_dir,
diff --git a/setup.py b/setup.py
index c90c95314c..ace0ac4f4f 100755
--- a/setup.py
+++ b/setup.py
@@ -153,9 +153,9 @@
     'nbconvert',
     'ipykernel', # bless IPython kernel for now
     'Send2Trash',
+    'terminado>=0.8.1'
 ]
 extras_require = {
-    ':sys_platform != "win32"': ['terminado>=0.3.3'],
     'test:python_version == "2.7"': ['mock'],
     'test': ['nose', 'coverage', 'requests', 'nose_warnings_filters', 'nbval'],
     'test:sys_platform == "win32"': ['nose-exclude'],