diff --git a/lib/context.ts b/lib/context.ts
new file mode 100644
index 00000000..26b45eeb
--- /dev/null
+++ b/lib/context.ts
@@ -0,0 +1,227 @@
+// SPDX-License-Identifier: AGPL-3.0-or-later
+// Copyright (C) 2025  bubbltaco
+
+import type { LocationChangeEvent, NarrationEvent, State } from "./state";
+
+// Type that represents each scene in context
+interface Scene {
+  // text for the entire scene
+  text: string;
+  // the summary for the scene
+  summary?: string;
+  // whether to use the scene summary in the context or not
+  summarize: boolean;
+}
+
+/**
+ * Get the context of events given the current state and token budget that we need to fit within.
+ * @param state The current state.
+ * @param tokenBudget The token budget.
+ * @returns The context as a string.
+ */
+export function getContext(state: State, tokenBudget: number): string {
+  // we filter down to only narration and location change events,
+  // because the other event types like character_introduction are implied in the narration
+  const events = state.events.filter((event) => event.type === "narration" || event.type === "location_change");
+
+  if (events.length === 0) {
+    return "";
+  }
+
+  // Create initial context
+  let context = createInitialContext(events, state);
+
+  // Step 1: Try full text without summaries
+  if (isContextWithinBudget(context, tokenBudget)) {
+    return convertContextToText(context);
+  }
+
+  // Step 2: Replace oldest scenes with their scene summaries (except latest scene)
+  context = replaceScenesWithSummaries(context, tokenBudget);
+  if (isContextWithinBudget(context, tokenBudget)) {
+    return convertContextToText(context);
+  }
+
+  // Step 3: Remove oldest scenes until we're under budget
+  context = removeOldestScenes(context, tokenBudget);
+  // if we're still not able to fit within budget (just the current scene takes up more than the budget) throw an error
+  if (!isContextWithinBudget(context, tokenBudget)) {
+    throw new Error("Unable to fit context within token budget even after summarization");
+  }
+
+  return convertContextToText(context);
+}
+
+/**
+ * Create the initial context without any compression.
+ * @param events events that should go in the context
+ * @param state current state
+ * @returns
+ */
+function createInitialContext(events: (NarrationEvent | LocationChangeEvent)[], state: State): Scene[] {
+  const scenes: Scene[] = [];
+
+  if (events.length === 0) {
+    return scenes;
+  }
+
+  // We go through all the events, as we encounter location changes, we create a new scene
+  let currentSceneEvents: (NarrationEvent | LocationChangeEvent)[] = [];
+  for (let i = 0; i < events.length; i++) {
+    const event = events[i];
+    if (event.type === "location_change") {
+      // If we have accumulated events from a previous scene, create a scene for them
+      if (currentSceneEvents.length > 0) {
+        const sceneText = createSceneText(currentSceneEvents, state);
+        scenes.push({
+          text: sceneText,
+          summary: event.summary, // the summary for the previous scene is stored in this location change event
+          summarize: false, // Initially all scenes use full text
+        });
+      }
+
+      // Start a new scene with this location change
+      currentSceneEvents = [event];
+    } else if (event.type === "narration") {
+      // Add narration events to the current scene
+      currentSceneEvents.push(event);
+    }
+  }
+
+  // Handle the final scene (if there are remaining events)
+  if (currentSceneEvents.length > 0) {
+    const sceneText = createSceneText(currentSceneEvents, state);
+    scenes.push({
+      text: sceneText,
+      summary: undefined, // The last scene doesn't have a summary yet
+      summarize: false,
+    });
+  }
+
+  return scenes;
+}
+
+/**
+ * Convert a sequence of events for a single scene into text.
+ * @param events The events that make up the scene
+ * @param state The current state
+ * @returns The text representation of the scene
+ */
+function createSceneText(events: (NarrationEvent | LocationChangeEvent)[], state: State): string {
+  const sceneParts: string[] = [];
+
+  for (const event of events) {
+    if (event.type === "location_change") {
+      sceneParts.push(convertLocationChangeEventToText(event, state));
+    } else if (event.type === "narration") {
+      sceneParts.push(event.text);
+    }
+  }
+
+  return sceneParts.join("\n\n");
+}
+
+/**
+ * Replace oldest scenes with their scene summaries (except the latest scene).
+ * @param context The current context.
+ * @param tokenBudget The token budget.
+ * @returns Updated context.
+ */
+function replaceScenesWithSummaries(context: Scene[], tokenBudget: number): Scene[] {
+  const scenes = [...context];
+
+  // Go through each scene (except the last one) and switch to summary if available
+  for (let i = 0; i < scenes.length - 1; i++) {
+    if (scenes[i].summary && !scenes[i].summarize) {
+      scenes[i] = { ...scenes[i], summarize: true };
+
+      // Check if we're now within budget
+      if (isContextWithinBudget(scenes, tokenBudget)) {
+        break;
+      }
+    }
+  }
+
+  return scenes;
+}
+
+/**
+ * Remove oldest scenes until we're under the token budget.
+ * Assume that at this point, all scenes except the most recent have been replaced with their summaries,
+ * So this will keep removing the oldest summaries until the most recent scene.
+ * @param context The current context.
+ * @param tokenBudget The token budget.
+ * @returns Updated context.
+ */
+function removeOldestScenes(context: Scene[], tokenBudget: number): Scene[] {
+  let scenes = [...context];
+
+  // Remove oldest scenes until we fit within budget or only have the current scene left
+  while (scenes.length > 1 && !isContextWithinBudget(scenes, tokenBudget)) {
+    scenes = scenes.slice(1); // Remove the oldest scene (first element)
+  }
+
+  return scenes;
+}
+
+/**
+ * Check if the current context is within the token budget.
+ * @param context The context to check.
+ * @param tokenBudget The token budget to compare against.
+ * @returns True if the context is within budget, false otherwise.
+ */
+function isContextWithinBudget(context: Scene[], tokenBudget: number): boolean {
+  const totalTokens = context.reduce(
+    (sum: number, scene) =>
+      sum + getApproximateTokenCount(scene.summarize && scene.summary ? scene.summary : scene.text),
+    0,
+  );
+  return totalTokens <= tokenBudget;
+}
+
+/**
+ * Converts a location change event to text.
+ * @param event The location change event to convert.
+ * @param state The current state
+ * @returns A string describing the location change event.
+ */
+export function convertLocationChangeEventToText(event: LocationChangeEvent, state: State): string {
+  const location = state.locations[event.locationIndex];
+  const cast = event.presentCharacterIndices
+    .map((index) => {
+      const character = state.characters[index];
+      return `${character.name}: ${character.biography}`;
+    })
+    .join("\n\n");
+
+  return `-----
+
+LOCATION CHANGE
+
+${state.protagonist.name} is entering ${location.name}. ${location.description}
+
+The following characters are present at ${location.name}:
+
+${cast}
+
+-----`;
+}
+
+/**
+ * Converts an array of scenes representing the context to text.
+ * @param scenes The context to convert.
+ * @returns A string representation of the context.
+ */
+function convertContextToText(scenes: Scene[]): string {
+  return scenes.map((scene) => (scene.summarize && scene.summary ? scene.summary : scene.text)).join("\n\n");
+}
+
+/**
+ * Estimates the number of tokens in a text string assuming 3 characters per token and rounding up.
+ * @param text The text to analyze.
+ * @returns The estimated token count.
+ */
+export function getApproximateTokenCount(text: string): number {
+  const numCharacters = text.length;
+  return Math.ceil(numCharacters / 3);
+}
diff --git a/lib/engine.ts b/lib/engine.ts
index 1efa4f23..8ab0c396 100644
--- a/lib/engine.ts
+++ b/lib/engine.ts
@@ -16,6 +16,7 @@ import {
   generateWorldPrompt,
   narratePrompt,
   type Prompt,
+  summarizeScenePrompt,
 } from "./prompts";
 import * as schemas from "./schemas";
 import { getState, initialState, type Location, type LocationChangeEvent, type NarrationEvent } from "./state";
@@ -212,6 +213,14 @@ export async function next(
             presentCharacterIndices: accompanyingCharacterIndices,
           };
 
+          // summarize the previous scene (all events after the last location change)
+          step = ["Summarizing scene", "This typically takes between 10 and 30 seconds"];
+          event.summary = await backend.getNarration(summarizeScenePrompt(state), (token: string, count: number) => {
+            event.summary += token;
+            onToken(token, count);
+            updateState();
+          });
+
           state.events.push(event);
           updateState();
 
diff --git a/lib/prompts.ts b/lib/prompts.ts
index 37c3a814..3c4139db 100644
--- a/lib/prompts.ts
+++ b/lib/prompts.ts
@@ -1,8 +1,9 @@
 // SPDX-License-Identifier: AGPL-3.0-or-later
 // Copyright (C) 2025  Philipp Emanuel Weidmann <pew@worldwidemann.com>
 
+import { convertLocationChangeEventToText, getApproximateTokenCount, getContext } from "./context";
 import * as schemas from "./schemas";
-import type { State } from "./state";
+import type { LocationChangeEvent, State } from "./state";
 
 export interface Prompt {
   system: string;
@@ -69,53 +70,34 @@ Include a short biography (100 words maximum) for each character.
 `);
 }
 
+const makeMainPromptPreamble = (
+  state: State,
+): string => `This is a fantasy adventure RPG set in the world of ${state.world.name}. ${state.world.description}
+
+The protagonist (who you should refer to as "you" in your narration, as the adventure happens from their perspective)
+is ${state.protagonist.name}. ${state.protagonist.biography}`;
+
 function makeMainPrompt(prompt: string, state: State): Prompt {
-  const context = state.events
-    .map((event) => {
-      if (event.type === "narration") {
-        return event.text;
-      } else if (event.type === "character_introduction") {
-        // Implied in the narration.
-        return null;
-      } else if (event.type === "location_change") {
-        // Also implied in the narration, but used to structure the story and describe available characters.
-        const location = state.locations[event.locationIndex];
-        return normalize(`
------
-
-LOCATION CHANGE
-
-${state.protagonist.name} is entering ${location.name}. ${location.description}
-
-The following characters are present at ${location.name}:
-
-${event.presentCharacterIndices
-  .map((index) => {
-    const character = state.characters[index];
-    return `${character.name}: ${character.biography}`;
-  })
-  .join("\n\n")}
-
------
-`);
-      }
-    })
-    .filter((text) => !!text)
-    .join("\n\n");
+  const promptPreamble = makeMainPromptPreamble(state);
 
-  return makePrompt(`
-This is a fantasy adventure RPG set in the world of ${state.world.name}. ${state.world.description}
+  // get the tokens used by the prompt and the preamble
+  const normalizedPrompt = normalize(prompt);
+  const promptTokens = getApproximateTokenCount(normalizedPrompt);
+  const preambleTokens = getApproximateTokenCount(promptPreamble);
 
-The protagonist (who you should refer to as "you" in your narration, as the adventure happens from their perspective)
-is ${state.protagonist.name}. ${state.protagonist.biography}
+  // get the context based on the token budget minus the prompt and preamble tokens
+  const contextTokenBudget = state.inputLength - promptTokens - preambleTokens;
+  const context = getContext(state, contextTokenBudget);
 
-Here is what has happened so far:
+  return makePrompt(`
+${promptPreamble}
 
+Here is what has happened so far:
 ${context}
 
 
 
-${normalize(prompt)}
+${normalizedPrompt}
 `);
 }
 
@@ -187,3 +169,52 @@ Include a short biography (100 words maximum) for each character.
     state,
   );
 }
+
+export function summarizeScenePrompt(state: State): Prompt {
+  const protagonistName = state.protagonist.name;
+
+  // Find the start of the current scene (most recent location change in state).
+  let sceneStartIndex = -1;
+  for (let i = state.events.length - 1; i >= 0; i--) {
+    if (state.events[i].type === "location_change") {
+      sceneStartIndex = i;
+      break;
+    }
+  }
+
+  // Build location + cast context from that location change
+  const mostRecentLocationChangeEvent = state.events[sceneStartIndex];
+  const sceneContext = convertLocationChangeEventToText(mostRecentLocationChangeEvent as LocationChangeEvent, state);
+
+  // Gather all narration texts from this scene (after the last location change).
+  const narrationTexts = state.events
+    .slice(sceneStartIndex + 1)
+    .map((ev) => (ev.type === "narration" ? ev.text : null))
+    .filter((t): t is string => !!t)
+    .join("\n\n");
+
+  const userPrompt = `
+${makeMainPromptPreamble(state)}
+
+You will create a compact memory of the just-completed scene. This memory is used as long-term context for future generations.
+Write a 1-2 paragraph scene summary (no more than 300 words in total).
+Use proper names and refer to the protagonist as "you".
+Capture only plot-relevant facts that will matter later such as:
+what ${protagonistName} does/learns/decides,
+changes to location, inventory, injuries, or relationships,
+discoveries/clues,
+unresolved goals, promises, threats, or deadlines.
+Do not quote dialogue, add new facts, or include stylistic prose.
+Return only the summary with no preamble, labels, markdown or quotes.
+
+Here's the context for the scene to summarize:
+
+${sceneContext}
+
+Here's the scene to summarize:
+
+${narrationTexts}
+`;
+
+  return makePrompt(userPrompt);
+}
diff --git a/lib/schemas.ts b/lib/schemas.ts
index a8ad5795..cb418e0f 100644
--- a/lib/schemas.ts
+++ b/lib/schemas.ts
@@ -67,6 +67,7 @@ export const LocationChangeEvent = z.object({
   type: z.literal("location_change"),
   locationIndex: Index,
   presentCharacterIndices: Index.array(),
+  summary: Text.max(5000).optional(),
 });
 
 export const Event = z.discriminatedUnion("type", [