diff --git a/src/storied/engine.py b/src/storied/engine.py
index 89a2958..4a4c2d4 100644
--- a/src/storied/engine.py
+++ b/src/storied/engine.py
@@ -20,7 +20,7 @@ from storied.claude import (
 )
 from storied.mcp_server import start_server as start_mcp_server
 from storied.content import ContentResolver
-from storied.log import CampaignLog
+from storied.log import CampaignLog, TranscriptLog
 from storied.session import (
     extract_wiki_links,
     format_session_context,
@@ -108,6 +108,9 @@ class DMEngine:
         # Campaign log for time tracking (world-scoped, shared with MCP server)
         self._campaign_log = CampaignLog(self.world_id, self.base_path)
 
+        # Transcript log for conversation history
+        self._transcript = TranscriptLog(self.world_id, self.base_path)
+
         # Start in-process MCP server (shares CampaignLog with engine)
         self._mcp = start_mcp_server(
             world_id=self.world_id,
@@ -161,7 +164,15 @@ class DMEngine:
             self._context_parts["Log"] = log_context
             parts.append(log_context)
 
-        # 3. Session state
+        # 3. Recent transcript (last 10 turns of dialogue)
+        transcript_context = self._transcript.recent_turns(
+            self._campaign_log.current_day,
+        )
+        if transcript_context:
+            self._context_parts["Transcript"] = transcript_context
+            parts.append(transcript_context)
+
+        # 4. Session state
         session = load_session(self.player_id, self.base_path)
         if session:
             session_context = format_session_context(session)
@@ -387,6 +398,7 @@ class DMEngine:
         current_tool_json = ""
         current_tool_name = ""
         deferred_notification = False
+        dm_text_parts: list[str] = []
 
         for event in stream_with_tools(
             system_prompt=system_prompt,
@@ -398,6 +410,7 @@ class DMEngine:
         ):
             match event:
                 case TextDelta(text=text):
+                    dm_text_parts.append(text)
                     yield text
 
                 case ToolStart(name=name):
@@ -447,6 +460,14 @@ class DMEngine:
                         "usage": r.usage,
                     })
 
+        # Write conversation turn to transcript
+        dm_response = "".join(dm_text_parts)
+        if dm_response.strip():
+            self._transcript.append_turn(
+                player_input, dm_response,
+                self._campaign_log.get_current_time(),
+            )
+
     def reset(self) -> None:
         """Reset the conversation state."""
         self._session_id = None
diff --git a/src/storied/log.py b/src/storied/log.py
index e8c3f0b..935ea1c 100644
--- a/src/storied/log.py
+++ b/src/storied/log.py
@@ -438,3 +438,72 @@ def log_event(
     """
     log = load_log(world_id, base_path)
     return log.append_entry(event, duration, advance_time, tags)
+
+
+class TranscriptLog:
+    """Running transcript of player/DM dialogue.
+
+    One file per game day in worlds/{world}/transcripts/. Each turn is a
+    markdown block with the game time, player input (blockquoted), and
+    the DM's response. The last N turns are injected into the DM's
+    system prompt for conversational memory.
+    """
+
+    def __init__(self, world_id: str, base_path: Path | None = None):
+        self.base_path = base_path or Path.cwd()
+        self.transcript_dir = self.base_path / "worlds" / world_id / "transcripts"
+
+    def _day_path(self, day: int) -> Path:
+        if day >= 0:
+            return self.transcript_dir / f"day+{day:03d}.md"
+        return self.transcript_dir / f"day{day:04d}.md"
+
+    def append_turn(
+        self, player_input: str, dm_response: str, game_time: "GameTime",
+    ) -> None:
+        """Append a turn to the current day's transcript."""
+        # Skip system messages (session starting, save requests, etc.)
+        if player_input.startswith("["):
+            return
+
+        self.transcript_dir.mkdir(parents=True, exist_ok=True)
+        path = self._day_path(game_time.day)
+
+        # Blockquote the player input
+        quoted = "\n".join(f"> {line}" for line in player_input.splitlines())
+
+        turn = (
+            f"\n### {game_time}\n\n"
+            f"{quoted}\n\n"
+            f"{dm_response.strip()}\n"
+        )
+
+        with path.open("a") as f:
+            f.write(turn)
+
+    def recent_turns(
+        self, current_day: int, n: int = 10,
+    ) -> str:
+        """Load the last N turns across recent days for context injection."""
+        turns: list[str] = []
+
+        # Check current day and previous day
+        for day in range(max(1, current_day - 1), current_day + 1):
+            path = self._day_path(day)
+            if not path.exists():
+                continue
+
+            content = path.read_text()
+            # Split on turn headers
+            sections = content.split("\n### ")
+            for section in sections:
+                section = section.strip()
+                if section:
+                    turns.append(f"### {section}")
+
+        if not turns:
+            return ""
+
+        # Take the last N
+        recent = turns[-n:]
+        return "## Recent Conversation\n\n" + "\n\n".join(recent)
diff --git a/tests/test_log.py b/tests/test_log.py
index 55918c1..ea74242 100644
--- a/tests/test_log.py
+++ b/tests/test_log.py
@@ -2,11 +2,14 @@
 
 import pytest
 
+from pathlib import Path
+
 from storied.log import (
     CampaignLog,
     Duration,
     GameTime,
     LogEntry,
+    TranscriptLog,
     load_log,
     log_event,
 )
@@ -254,3 +257,86 @@ class TestConvenienceFunctions:
         # Verify it was saved
         log = load_log(world_id="test", base_path=tmp_path)
         assert len(log.current_entries) == 1
+
+
+# ── TranscriptLog ────────────────────────────────────────────────────────
+
+
+@pytest.fixture
+def transcript(tmp_path: Path) -> TranscriptLog:
+    (tmp_path / "worlds" / "test").mkdir(parents=True)
+    return TranscriptLog("test", tmp_path)
+
+
+class TestTranscriptLog:
+    def test_append_creates_file(self, transcript: TranscriptLog, tmp_path: Path):
+        transcript.append_turn(
+            "I look around", "The tavern is dimly lit.",
+            GameTime(day=1, hour=8, minute=0),
+        )
+        path = tmp_path / "worlds" / "test" / "transcripts" / "day+001.md"
+        assert path.exists()
+
+    def test_turn_format(self, transcript: TranscriptLog, tmp_path: Path):
+        transcript.append_turn(
+            "I look around", "The tavern is dimly lit.",
+            GameTime(day=1, hour=8, minute=0),
+        )
+        content = (tmp_path / "worlds" / "test" / "transcripts" / "day+001.md").read_text()
+        assert "> I look around" in content
+        assert "The tavern is dimly lit." in content
+        assert "### Day 1, 08:00" in content
+
+    def test_multiple_turns_append(self, transcript: TranscriptLog):
+        time1 = GameTime(day=1, hour=8, minute=0)
+        time2 = GameTime(day=1, hour=8, minute=15)
+        transcript.append_turn("First", "Response one.", time1)
+        transcript.append_turn("Second", "Response two.", time2)
+        context = transcript.recent_turns(1)
+        assert "First" in context
+        assert "Second" in context
+
+    def test_skips_system_messages(self, transcript: TranscriptLog, tmp_path: Path):
+        transcript.append_turn(
+            "[Session starting]", "Welcome back!",
+            GameTime(day=1, hour=8, minute=0),
+        )
+        path = tmp_path / "worlds" / "test" / "transcripts" / "day+001.md"
+        assert not path.exists()
+
+    def test_recent_turns_limit(self, transcript: TranscriptLog):
+        for i in range(15):
+            transcript.append_turn(
+                f"Turn {i}", f"Response {i}.",
+                GameTime(day=1, hour=8, minute=i),
+            )
+        context = transcript.recent_turns(1, n=5)
+        assert "Turn 10" in context
+        assert "Turn 14" in context
+        assert "Turn 0" not in context
+
+    def test_recent_turns_empty(self, transcript: TranscriptLog):
+        assert transcript.recent_turns(1) == ""
+
+    def test_recent_turns_spans_days(self, transcript: TranscriptLog):
+        transcript.append_turn(
+            "Yesterday", "Something happened.",
+            GameTime(day=1, hour=20, minute=0),
+        )
+        transcript.append_turn(
+            "Today", "Morning arrives.",
+            GameTime(day=2, hour=8, minute=0),
+        )
+        context = transcript.recent_turns(2)
+        assert "Yesterday" in context
+        assert "Today" in context
+
+    def test_includes_display_blocks(self, transcript: TranscriptLog):
+        dm_response = "You see:\n\n```map Tavern\n+-+\n|X|\n+-+\n```\n\nThe tavern."
+        transcript.append_turn(
+            "Look around", dm_response,
+            GameTime(day=1, hour=8, minute=0),
+        )
+        context = transcript.recent_turns(1)
+        assert "```map" in context
+        assert "+-+" in context