For 1994, the Mustang underwent its first major redesign in 15 years. The new design, code named "SN-95" by Ford, was still based on the "Fox" platform, but featured dramatically new styling by Patrick Schiavone that incorporated some stylistic throwbacks to earlier Mustangs.

The car remained rear-wheel drive. It greatly revived the popularity of the brand. The base model came with a 3.8 L V6 engine rated at 145 hp (108 kW) while the GT featured the "5.0" 4.9 L V8, which now utilized the 5.0L Thunderbird intake manifold and a larger, 60mm throttle body, and was now rated at 215 horsepower. The successful Cobra model also returned, with its GT-40 equipped 5.0 L engine, now rated at 240 hp (179 kW), the extra 5 horsepower coming from a 70mm throttle body. The Mustang Cobra convertible was selected as the Pace Car for the Indianapolis 500, making it the third time that the Mustang had enjoyed such an honor. One thousand replicas were built and sold through select dealers. Larger brakes, a different transmission, and suspension modification followed. The Mustang was named Motor Trend magazine's Car of the Year for the third time in 1994.

In 1996, Mustang fans were expecting the 5.8 L (351 in³) V8 to make its return to the regular production. However, this is not what they got. The 5.0 GT engine was replaced by a 215 hp (160 kW) 4.6 L SOHC "Modular" V8 engine. This engine had been introduced in Lincoln models, and was part of Ford's plan to "modernize" its engine lineup. The engine has two valves per cylinders, one for intake and one for exhaust. Despite being SOHC, it was not much of a revver, and while torquey, didn't make much power past 5000 rpm.

The Cobra version was updated that year with a high-revving 305 hp (227 kW) dual over head cam configuration of the 4.6 L V8. The Cobra's block, cast by Teksid of Italy, was an aluminum, cross-bolted block. The heads had split ports and huge valves, and were arguably a little much for the street, but are still a favorite of modular race teams. To compensate for the relative lack of low end response associated with these kind of cylinder heads, SVT also put an intake manifold with dual runners on the Cobra, with the secondaries not opening until around 3000 rpm, making these early modular Cobras very responsive at low speeds.

In 1996, the 3.8 L V6 was bumped to a 150 hp (112 kW) rating. The longer valve covers for 8 cylinders not-withstanding, when the hood was opened up, the V6 mustangs were arguably more aesthetically pleasing than the V8 models, since the V8 engine bay was on the bland side, a far cry from the 5.0 engine bays, which the V6 actually resembles.

In 1998 the SOHC 4.6 L V8 power was increased to 225 hp (168 kW) with a more aggressive computer, new factory headers, and larger exhaust tail pipes. A 4RW70 automatic replaced the clunky AOD automatic transmission. This was also the last year of the "Round Body Mustang." 1998 was also the only year that the "Sports" packaged was offered. It included unique black stripe (regardless of car color) on the hood which extended over to the wheel wells, and nice wheels unique to that trim.
Though it wasn’t changed much from the years before, the 1998 model year still was a truly refined vehicle that buyers respected. Equally at home on the racetrack or running errands to the grocery store, the 1998 Mustang offered customers the perfect balance of style, affordability, and comfort.

A refreshed model with Ford's "New Edge" styling themes came in 1999. Gone were many of the soft lines of the early SN-95s. Moreover, bite was added to the Mustang's bark. Even though the GT's 4.6 motor was out-sized by the 346-inch LS1 Camaros, the GT was far less expensive, and didn't have the quality issues that the F-bodies were known for, resulting in the Mustang trouncing the Camaro/Firebird in sales. In 1999, Mustang GT's power increased to 260 hp (194 kW) at 5250 rpm and a healthy 302 ft·lbf (409 N•m) of torque at 4000 rpm; redline was at 6000 rpm. Power suffered at the low end on this engine in comparison to the earlier SOHC models, but it more than made up for it at higher RPM due to the new "performance improvement" heads, cams, and intake manifold. The 4.6 Mustang now felt more like a high winding performance motor, as compared to the earlier 4.6's, which were essentially truck motors with dual exhaust.

The Mustang GT now did the 1/4 mile in just under 14 seconds, versus the 98 GT's mid-14 second performances, and in 2000, Ford very silently put in more aggressive cams and raised the compression on the GT's, as well as offering a 3.55:1 final drive. These changes put the GT solidly into the high 13's in the 1/4 mile, with trap speeds around 100 mph. Ford did leave many of their fans disappointed however, as there was a rumored(and spotted) GT with a 5.4 SOHC V8 with a 290 horsepower rating. Ford never followed through on it. On the V6 models, split-port induction replaced single-port induction, which increased the base model's power to 190 hp (142 kW). While the Cobra claimed 320 hp (239 kW), some magazines and owners contradicted it. 5.0 Mustangs and Super Fords claimed that it actually exceeded the torque rating, but didn't quite match the power rating. There were recalls for the 1999 model year Cobras, which were given intake and exhaust improvements, putting power at 320 hp to match the original claim. As a result, the Cobra was not produced in 2000 (except the limited Cobra R) and the company developed new parts to replace the missing power. These changes were incorporated into the 2001 model year Cobra, and when fixed, these quad-cammed mustangs hurry through the 1/4 mile in the lower to mid-13 second range.

Power came from re-designed heads and cams. As a "modular" family, earlier 4.6 L SOHC’s can swap out their heads with "Power Improved" heads as offered through the Ford Parts Catalog. Due to a different combustion chamber and pistons, the compression gets bumped to about 10.7:1, and requires premium fuel. The Cobras received similar improvements, as a switch was made from "B" style heads as used in the early 32 valve DOHC Modulars to "C" heads (aka Tumbleports). Redline was set at 7000 rpm for the DOHC Cobra. The Cobra also received an independent rear suspension, which was also modular.

In 2001, Ford offered a special version of its GT with the "Bullitt" nameplate. It was reminiscent of the 1968 390 fastback model driven by Steve McQueen in the movie of the same name. The car was slightly lowered and had name brand shocks with the addition of short length sub-frame connectors which improved the handling. Many lauded the improvements and called it the best handling production Mustang ever. Moreover, a new intake design and mufflers added put the power at 265 hp, later revised to a still conservative 270. More telling is the torque curve, which was vastly improved over the base GT models, 90% of its 302 ft·lbf available from 2000 rpm. This broader torque curve makes itself known at the drag strip, as these special edition mustangs could cover the 1/4 mile in 3-4 tenths of a second faster than a regular GT. These special intake manifolds also responded very well to superchargers, and were great for nitrous oxide, due to the fact that if there is a nitrous-backfire, the aluminum bullitt manifold wouldn't blow into a million pieces. 17 inch “American Torq-Thrust,” wheels reminiscent of those on the car driven by McQueen in the movie were also used on this car and made optional on GT’s wrapped in 245/45ZR performance rubber by Goodyear. The Bullitt featured a hood scoop that first appeared on the 1999 35th anniversary package Mustang GT’s, as well as new side scoops, lower body moldings and c-pillars with unique rear side window shape. Other special features on the Bullitt included aluminum pedals and shifter, retro-styled gauges and seats, red brake calipers with the Mustang logo on them, and the removal of the spoiler and fog lamps regularly found on Mustang GT’s, all for a cleaner look. The Bullitt Mustang was offered in only three colors: Dark Highland Green (like Steve McQueen's original Bullitt Mustang), True Blue, and Black. Total production was 5582 units, with 3041 of those in Dark Highland Green.

In 2001, a hood scoop similar in design to the 35th anniversary scoops, and non-functional side scoops were added to GT models, and made optional on the V6 as part of a "pony package." Smoked headlights from the Cobra R and a new deck wing replaced the old chrome look headlights and the sweeping wing.

As electronic engine management and emissions technology developed, so too did performance. The lone remaining 1960s muscle car marques; Mustang, Camaro and Firebird, all grew in power and handling better than the cars that preceded them. With the end of production of the Camaro and Firebird lines in 2002, only the Mustang remains as the sole survivor of the pony car era.

Debuting in Spring 2002 as a 2003 model, the Cobra returned, this time with vastly increased power and handling. Dubbed during development as the "Terminator" Cobra, it received a T56 6-spd transmission coupled with a supercharged 4.6L DOHC V8. Due to the reduced power handling capability of the new WAP aluminum blocks, these new Cobras used the GT's cast iron engine block. Power was rated at 390 hp (290 kW). Muscle Mustangs & Fast Fords and other Ford-themed magazines have performed dyno tests on several Cobras that put down rear-wheel power numbers in excess of 380 hp, which would suggest actual flywheel power to be around 450 hp. This amount of power meant that the 2003 Cobra was capable of mid-12-second quarter-mile times right off the showroom floor.

Also returning in 2003 was the "Mach 1" nameplate. The original 1969 and 1970 Mustang Mach 1s were (and remain) some of the most popular Mustangs ever, so Ford decided to try to keep interest in the Mustang high until the release of the S-197 with yet another special-edition Mustang. The Mach 1 used a non-supercharged version of the Cobra's 4.6 DOHC V8 which utilized cams from the Lincoln Navigator motor, and it was conservatively rated at 305 hp. Other special features included "retro" interior styling, with seats made to look like the "comfortweave" seats in the original Mach 1s, old-style gauges, and aluminum pedals and shifter. Outside, the Mach 1 featured a striping package and blacked-out spoiler designed to mimic the original Mach 1, "Magnum 500" styled 17-inch wheels, and a "Shaker" hoodscoop. The "Shaker" hoodscoop was special, and so named because it was attached to the engine and stuck out through a hole in the hood, and would move with the torque of the motor. Ford utilized the same casting for the new "Shaker" that they had for the 1969 model year. The Mach 1 was also produced for 2004. Despite having camshafts that produce power at lower rpm, the Mach 1's 4.6 made just as much horsepower as the 01' Cobra, due to the 4-valve heads being revised, the compression being bumped to 10:1, and the ram-air system. It also out-torqued the Cobra, and had 3.55:1 rear gears, making it capable of very low 13- second 1/4 mile times with a good driver.

In 2004, Ford produced a special 40th Anniversary Edition of the Mustang. Available in both Standard and GT editions, it consisted of 40th Anniversary badging, special metallic red paint with gold stripes, enhanced interior, and some "special" collectable items for the owner. It also marked the end of this design of the Mustang, as 2005 ushered in an all-new model.