diff --git a/packages/agent/src/agent.ts b/packages/agent/src/agent.ts
index db6684a8a..56283849b 100644
--- a/packages/agent/src/agent.ts
+++ b/packages/agent/src/agent.ts
@@ -334,13 +334,14 @@ export class Agent {
 		await this.runPromptMessages(messages);
 	}
 
-	/** Continue from the current transcript. The last message must be a user or tool-result message. */
+	/** Continue from the current transcript. The last LLM-context message must be a user or tool-result message. */
 	async continue(): Promise<void> {
 		if (this.activeRun) {
 			throw new Error("Agent is already processing. Wait for completion before continuing.");
 		}
 
-		const lastMessage = this._state.messages[this._state.messages.length - 1];
+		const llmMessages = await this.convertToLlm(this._state.messages);
+		const lastMessage = llmMessages[llmMessages.length - 1];
 		if (!lastMessage) {
 			throw new Error("No messages to continue from");
 		}
diff --git a/packages/agent/src/harness/compaction/compaction.ts b/packages/agent/src/harness/compaction/compaction.ts
index 7582b696b..0f48ded01 100644
--- a/packages/agent/src/harness/compaction/compaction.ts
+++ b/packages/agent/src/harness/compaction/compaction.ts
@@ -269,10 +269,20 @@ export function estimateTokens(message: AgentMessage): number {
 
 	return 0;
 }
+function isExcludedCustomContextEntry(entry: SessionTreeEntry): boolean {
+	return (
+		(entry.type === "custom_message" && entry.excludeFromContext === true) ||
+		(entry.type === "message" && entry.message.role === "custom" && entry.message.excludeFromContext === true)
+	);
+}
+
 function findValidCutPoints(entries: SessionTreeEntry[], startIndex: number, endIndex: number): number[] {
 	const cutPoints: number[] = [];
 	for (let i = startIndex; i < endIndex; i++) {
 		const entry = entries[i];
+		if (isExcludedCustomContextEntry(entry)) {
+			continue;
+		}
 		switch (entry.type) {
 			case "message": {
 				const role = entry.message.role;
@@ -313,6 +323,9 @@ function findValidCutPoints(entries: SessionTreeEntry[], startIndex: number, end
 export function findTurnStartIndex(entries: SessionTreeEntry[], entryIndex: number, startIndex: number): number {
 	for (let i = entryIndex; i >= startIndex; i--) {
 		const entry = entries[i];
+		if (isExcludedCustomContextEntry(entry)) {
+			continue;
+		}
 		if (entry.type === "branch_summary" || entry.type === "custom_message") {
 			return i;
 		}
@@ -371,6 +384,9 @@ export function findCutPoint(
 		if (prevEntry.type === "compaction") {
 			break;
 		}
+		if (isExcludedCustomContextEntry(prevEntry)) {
+			break;
+		}
 		if (prevEntry.type === "message") {
 			break;
 		}
diff --git a/packages/agent/test/agent.test.ts b/packages/agent/test/agent.test.ts
index 4cc51f744..8839aa393 100644
--- a/packages/agent/test/agent.test.ts
+++ b/packages/agent/test/agent.test.ts
@@ -1,7 +1,19 @@
-import { type AssistantMessage, type AssistantMessageEvent, EventStream, getModel } from "@earendil-works/pi-ai";
+import {
+	type AssistantMessage,
+	type AssistantMessageEvent,
+	EventStream,
+	getModel,
+	type Message,
+} from "@earendil-works/pi-ai";
 import { Type } from "typebox";
 import { describe, expect, it } from "vitest";
-import { Agent, type AgentEvent, type AgentTool, type AgentToolUpdateCallback } from "../src/index.ts";
+import {
+	Agent,
+	type AgentEvent,
+	type AgentMessage,
+	type AgentTool,
+	type AgentToolUpdateCallback,
+} from "../src/index.ts";
 
 // Mock stream that mimics AssistantMessageEventStream
 class MockAssistantStream extends EventStream<AssistantMessageEvent, AssistantMessage> {
@@ -586,6 +598,54 @@ describe("Agent", () => {
 		expect(agent.state.messages[agent.state.messages.length - 1].role).toBe("assistant");
 	});
 
+	it("continue() should process queued follow-up messages after filtered state messages", async () => {
+		let providerCallCount = 0;
+		let providerMessages: Message[] = [];
+		const displayOnlyMessage = {
+			role: "displayOnly",
+			content: "status",
+			timestamp: Date.now(),
+		} as unknown as AgentMessage;
+		const agent = new Agent({
+			convertToLlm: (messages) =>
+				messages
+					.filter((message) => (message as { role: string }).role !== "displayOnly")
+					.filter(
+						(message) => message.role === "user" || message.role === "assistant" || message.role === "toolResult",
+					) as Message[],
+			streamFn: (_model, context) => {
+				providerCallCount++;
+				providerMessages = context.messages;
+				const stream = new MockAssistantStream();
+				queueMicrotask(() => {
+					stream.push({ type: "done", reason: "stop", message: createAssistantMessage("Processed") });
+				});
+				return stream;
+			},
+		});
+
+		agent.state.messages = [
+			{
+				role: "user",
+				content: [{ type: "text", text: "Initial" }],
+				timestamp: Date.now() - 10,
+			},
+			createAssistantMessage("Initial response"),
+			displayOnlyMessage,
+		];
+		agent.followUp({
+			role: "user",
+			content: [{ type: "text", text: "Queued follow-up" }],
+			timestamp: Date.now(),
+		});
+
+		await agent.continue();
+
+		expect(providerCallCount).toBe(1);
+		expect(providerMessages[providerMessages.length - 1]?.role).toBe("user");
+		expect(agent.state.messages).toContain(displayOnlyMessage);
+	});
+
 	it("continue() should keep one-at-a-time steering semantics from assistant tail", async () => {
 		let responseCount = 0;
 		const agent = new Agent({
diff --git a/packages/agent/test/harness/compaction.test.ts b/packages/agent/test/harness/compaction.test.ts
index abcf1b5fe..7877bf56e 100644
--- a/packages/agent/test/harness/compaction.test.ts
+++ b/packages/agent/test/harness/compaction.test.ts
@@ -234,6 +234,42 @@ describe("harness compaction", () => {
 			isSplitTurn: false,
 		});
 
+		const cutUser = createMessageEntry(createUserMessage("inspect file"));
+		const cutAssistant = createMessageEntry(
+			{
+				...createAssistantMessage("calling tool"),
+				content: [{ type: "toolCall", id: "call-2", name: "read", arguments: { path: "file.ts" } }],
+			},
+			cutUser.id,
+		);
+		const cutToolResult = createMessageEntry(
+			{
+				role: "toolResult",
+				toolCallId: "call-2",
+				toolName: "read",
+				content: [{ type: "text", text: "x".repeat(1000) }],
+				isError: false,
+				timestamp: Date.now(),
+			},
+			cutAssistant.id,
+		);
+		const excludedCustom: CustomMessageEntry = {
+			type: "custom_message",
+			id: createId(),
+			parentId: cutToolResult.id,
+			timestamp: new Date().toISOString(),
+			customType: "status",
+			content: "tool finished",
+			display: true,
+			excludeFromContext: true,
+		};
+		const cutAssistantFinal = createMessageEntry(createAssistantMessage("done"), excludedCustom.id);
+		expect(findCutPoint([cutUser, cutAssistant, cutToolResult, excludedCustom, cutAssistantFinal], 0, 5, 2)).toEqual({
+			firstKeptEntryIndex: 4,
+			turnStartIndex: 0,
+			isSplitTurn: true,
+		});
+
 		const user = createMessageEntry(createUserMessage("user"));
 		const compaction = createCompactionEntry("summary", user.id, user.id);
 		const assistant = createMessageEntry(createAssistantMessage("assistant"), compaction.id);
@@ -410,6 +446,56 @@ describe("harness compaction", () => {
 		expect(preparation?.messagesToSummarize).toEqual([]);
 	});
 
+	it("ignores excluded custom messages when finding split-turn prefixes", () => {
+		const user = createMessageEntry(createUserMessage("inspect file"));
+		const assistantWithToolCall = createMessageEntry(
+			{
+				...createAssistantMessage("calling tool"),
+				content: [{ type: "toolCall", id: "call-1", name: "read", arguments: { path: "file.ts" } }],
+			},
+			user.id,
+		);
+		const customMessage: CustomMessageEntry = {
+			type: "custom_message",
+			id: createId(),
+			parentId: assistantWithToolCall.id,
+			timestamp: new Date().toISOString(),
+			customType: "status",
+			content: "tool is running",
+			display: true,
+			excludeFromContext: true,
+		};
+		const toolResult = createMessageEntry(
+			{
+				role: "toolResult",
+				toolCallId: "call-1",
+				toolName: "read",
+				content: [{ type: "text", text: "x".repeat(1000) }],
+				isError: false,
+				timestamp: Date.now(),
+			},
+			customMessage.id,
+		);
+		const assistantFinal = createMessageEntry(createAssistantMessage("done"), toolResult.id);
+
+		const preparation = getOrThrow(
+			prepareCompaction([user, assistantWithToolCall, customMessage, toolResult, assistantFinal], {
+				enabled: true,
+				reserveTokens: 0,
+				keepRecentTokens: 1,
+			}),
+		);
+
+		expect(preparation).toBeDefined();
+		expect(preparation?.isSplitTurn).toBe(true);
+		expect(preparation?.firstKeptEntryId).toBe(assistantFinal.id);
+		expect(preparation?.turnPrefixMessages.map((message) => message.role)).toEqual([
+			"user",
+			"assistant",
+			"toolResult",
+		]);
+	});
+
 	it("skips excluded custom messages before branch summary token budgeting", () => {
 		const user = createMessageEntry(createUserMessage("keep"));
 		const customMessage: CustomMessageEntry = {
diff --git a/packages/coding-agent/src/core/agent-session.ts b/packages/coding-agent/src/core/agent-session.ts
index 3a6ad0874..4d82185a6 100644
--- a/packages/coding-agent/src/core/agent-session.ts
+++ b/packages/coding-agent/src/core/agent-session.ts
@@ -583,6 +583,25 @@ export class AgentSession {
 		return undefined;
 	}
 
+	private _removeAssistantMessageFromState(target: AssistantMessage): void {
+		const messages = this.agent.state.messages;
+		for (let i = messages.length - 1; i >= 0; i--) {
+			const message = messages[i];
+			if (
+				message === target ||
+				(message.role === "assistant" &&
+					message.timestamp === target.timestamp &&
+					message.provider === target.provider &&
+					message.model === target.model &&
+					message.stopReason === target.stopReason &&
+					message.errorMessage === target.errorMessage)
+			) {
+				this.agent.state.messages = [...messages.slice(0, i), ...messages.slice(i + 1)];
+				return;
+			}
+		}
+	}
+
 	private _replaceMessageInPlace(target: AgentMessage, replacement: AgentMessage): void {
 		// Agent-core stores the finalized message object in its state before emitting message_end.
 		// SessionManager persistence happens later in _handleAgentEvent() with event.message.
@@ -1850,11 +1869,8 @@ export class AgentSession {
 			this._overflowRecoveryAttempted = true;
 			// Remove the error message from agent state (it IS saved to session for history,
 			// but we don't want it in context for the retry)
-			const messages = this.agent.state.messages;
-			if (messages.length > 0 && messages[messages.length - 1].role === "assistant") {
-				this.agent.state.messages = messages.slice(0, -1);
-			}
-			return await this._runAutoCompaction("overflow", true);
+			this._removeAssistantMessageFromState(assistantMessage);
+			return await this._runAutoCompaction("overflow", true, assistantMessage);
 		}
 
 		// Case 2: Threshold - context is getting large
@@ -1889,7 +1905,11 @@ export class AgentSession {
 	/**
 	 * Internal: Run auto-compaction with events.
 	 */
-	private async _runAutoCompaction(reason: "overflow" | "threshold", willRetry: boolean): Promise<boolean> {
+	private async _runAutoCompaction(
+		reason: "overflow" | "threshold",
+		willRetry: boolean,
+		retryAssistantMessage?: AssistantMessage,
+	): Promise<boolean> {
 		const settings = this.settingsManager.getCompactionSettings();
 
 		this._emit({ type: "compaction_start", reason });
@@ -2037,10 +2057,8 @@ export class AgentSession {
 			this._emit({ type: "compaction_end", reason, result, aborted: false, willRetry });
 
 			if (willRetry) {
-				const messages = this.agent.state.messages;
-				const lastMsg = messages[messages.length - 1];
-				if (lastMsg?.role === "assistant" && (lastMsg as AssistantMessage).stopReason === "error") {
-					this.agent.state.messages = messages.slice(0, -1);
+				if (retryAssistantMessage) {
+					this._removeAssistantMessageFromState(retryAssistantMessage);
 				}
 				return true;
 			}
@@ -2525,10 +2543,7 @@ export class AgentSession {
 		});
 
 		// Remove error message from agent state (keep in session for history)
-		const messages = this.agent.state.messages;
-		if (messages.length > 0 && messages[messages.length - 1].role === "assistant") {
-			this.agent.state.messages = messages.slice(0, -1);
-		}
+		this._removeAssistantMessageFromState(message);
 
 		// Wait with exponential backoff (abortable)
 		this._retryAbortController = new AbortController();
diff --git a/packages/coding-agent/src/core/compaction/compaction.ts b/packages/coding-agent/src/core/compaction/compaction.ts
index 46f802b70..523aeb78b 100644
--- a/packages/coding-agent/src/core/compaction/compaction.ts
+++ b/packages/coding-agent/src/core/compaction/compaction.ts
@@ -313,10 +313,20 @@ export function estimateTokens(message: AgentMessage): number {
  * and will be kept.
  * BashExecutionMessage is treated like a user message (user-initiated context).
  */
+function isExcludedCustomContextEntry(entry: SessionEntry): boolean {
+	return (
+		(entry.type === "custom_message" && entry.excludeFromContext === true) ||
+		(entry.type === "message" && entry.message.role === "custom" && entry.message.excludeFromContext === true)
+	);
+}
+
 function findValidCutPoints(entries: SessionEntry[], startIndex: number, endIndex: number): number[] {
 	const cutPoints: number[] = [];
 	for (let i = startIndex; i < endIndex; i++) {
 		const entry = entries[i];
+		if (isExcludedCustomContextEntry(entry)) {
+			continue;
+		}
 		switch (entry.type) {
 			case "message": {
 				const role = entry.message.role;
@@ -361,6 +371,9 @@ function findValidCutPoints(entries: SessionEntry[], startIndex: number, endInde
 export function findTurnStartIndex(entries: SessionEntry[], entryIndex: number, startIndex: number): number {
 	for (let i = entryIndex; i >= startIndex; i--) {
 		const entry = entries[i];
+		if (isExcludedCustomContextEntry(entry)) {
+			continue;
+		}
 		// branch_summary and custom_message are user-role messages, can start a turn
 		if (entry.type === "branch_summary" || entry.type === "custom_message") {
 			return i;
@@ -444,6 +457,9 @@ export function findCutPoint(
 		if (prevEntry.type === "compaction") {
 			break;
 		}
+		if (isExcludedCustomContextEntry(prevEntry)) {
+			break;
+		}
 		if (prevEntry.type === "message") {
 			// Stop if we hit any message
 			break;
diff --git a/packages/coding-agent/src/modes/print-mode.ts b/packages/coding-agent/src/modes/print-mode.ts
index a5ee02355..fa537277f 100644
--- a/packages/coding-agent/src/modes/print-mode.ts
+++ b/packages/coding-agent/src/modes/print-mode.ts
@@ -128,10 +128,19 @@ export async function runPrintMode(runtimeHost: AgentSessionRuntime, options: Pr
 
 		if (mode === "text") {
 			const state = session.state;
-			const lastMessage = state.messages[state.messages.length - 1];
+			let assistantMsg: AssistantMessage | undefined;
+			for (let i = state.messages.length - 1; i >= 0; i--) {
+				const message = state.messages[i];
+				if (message.role === "custom" && message.excludeFromContext) {
+					continue;
+				}
+				if (message.role === "assistant") {
+					assistantMsg = message;
+				}
+				break;
+			}
 
-			if (lastMessage?.role === "assistant") {
-				const assistantMsg = lastMessage as AssistantMessage;
+			if (assistantMsg) {
 				if (assistantMsg.stopReason === "error" || assistantMsg.stopReason === "aborted") {
 					console.error(assistantMsg.errorMessage || `Request ${assistantMsg.stopReason}`);
 					exitCode = 1;
diff --git a/packages/coding-agent/test/compaction.test.ts b/packages/coding-agent/test/compaction.test.ts
index 037ff5f85..b709e8df2 100644
--- a/packages/coding-agent/test/compaction.test.ts
+++ b/packages/coding-agent/test/compaction.test.ts
@@ -346,6 +346,31 @@ describe("findCutPoint", () => {
 			expect(result.turnStartIndex).toBe(2); // Turn 2 starts at index 2
 		}
 	});
+
+	it("should not select excluded custom messages as cut points", () => {
+		const user = createMessageEntry(createUserMessage("inspect file"));
+		const assistantWithToolCall = createMessageEntry({
+			...createAssistantMessage("calling tool"),
+			content: [{ type: "toolCall", id: "call-1", name: "read", arguments: { path: "file.ts" } }],
+		});
+		const toolResult = createMessageEntry({
+			role: "toolResult",
+			toolCallId: "call-1",
+			toolName: "read",
+			content: [{ type: "text", text: "x".repeat(1000) }],
+			isError: false,
+			timestamp: Date.now(),
+		});
+		const excludedCustom = createCustomMessageEntry("tool finished", true);
+		const assistantFinal = createMessageEntry(createAssistantMessage("done"));
+		const entries = [user, assistantWithToolCall, toolResult, excludedCustom, assistantFinal];
+
+		const result = findCutPoint(entries, 0, entries.length, 2);
+
+		expect(result.firstKeptEntryIndex).toBe(4);
+		expect(result.turnStartIndex).toBe(0);
+		expect(result.isSplitTurn).toBe(true);
+	});
 });
 
 describe("buildSessionContext", () => {
@@ -448,6 +473,39 @@ describe("prepareCompaction with custom messages", () => {
 		expect(preparation!.tokensBefore).toBe(1);
 		expect(preparation!.messagesToSummarize).toEqual([]);
 	});
+
+	it("should ignore excluded custom messages when finding split-turn prefixes", () => {
+		const user = createMessageEntry(createUserMessage("inspect file"));
+		const assistantWithToolCall = createMessageEntry({
+			...createAssistantMessage("calling tool"),
+			content: [{ type: "toolCall", id: "call-1", name: "read", arguments: { path: "file.ts" } }],
+		});
+		const excludedCustom = createCustomMessageEntry("tool is running", true);
+		const toolResult = createMessageEntry({
+			role: "toolResult",
+			toolCallId: "call-1",
+			toolName: "read",
+			content: [{ type: "text", text: "x".repeat(1000) }],
+			isError: false,
+			timestamp: Date.now(),
+		});
+		const assistantFinal = createMessageEntry(createAssistantMessage("done"));
+
+		const preparation = prepareCompaction([user, assistantWithToolCall, excludedCustom, toolResult, assistantFinal], {
+			enabled: true,
+			reserveTokens: 0,
+			keepRecentTokens: 1,
+		});
+
+		expect(preparation).toBeDefined();
+		expect(preparation!.isSplitTurn).toBe(true);
+		expect(preparation!.firstKeptEntryId).toBe(assistantFinal.id);
+		expect(preparation!.turnPrefixMessages.map((message) => message.role)).toEqual([
+			"user",
+			"assistant",
+			"toolResult",
+		]);
+	});
 });
 
 describe("prepareCompaction with previous compaction", () => {
diff --git a/packages/coding-agent/test/suite/agent-session-queue.test.ts b/packages/coding-agent/test/suite/agent-session-queue.test.ts
index ed29425b7..7da0b70f0 100644
--- a/packages/coding-agent/test/suite/agent-session-queue.test.ts
+++ b/packages/coding-agent/test/suite/agent-session-queue.test.ts
@@ -514,12 +514,20 @@ describe("AgentSession queue characterization", () => {
 
 	it("delivers follow-ups queued during agent_end", async () => {
 		let sent = false;
+		let sawFollowUpInProvider = false;
 		const harness = await createHarness({
 			extensionFactories: [
 				(pi: ExtensionAPI) => {
 					pi.on("agent_end", async () => {
 						if (sent) return;
 						sent = true;
+						pi.sendMessage({
+							customType: "status",
+							content: "display only",
+							display: true,
+							details: {},
+							excludeFromContext: true,
+						});
 						pi.sendUserMessage("conflict report", { deliverAs: "followUp" });
 					});
 				},
@@ -527,11 +535,23 @@ describe("AgentSession queue characterization", () => {
 		});
 		harnesses.push(harness);
 
-		harness.setResponses([fauxAssistantMessage("reply"), fauxAssistantMessage("follow-up reply")]);
+		harness.setResponses([
+			fauxAssistantMessage("reply"),
+			(context) => {
+				sawFollowUpInProvider = context.messages.some(
+					(message) => message.role === "user" && getMessageText(message) === "conflict report",
+				);
+				return fauxAssistantMessage("follow-up reply");
+			},
+		]);
 
 		await harness.session.prompt("hello");
 		await harness.session.agent.waitForIdle();
 
+		expect(sawFollowUpInProvider).toBe(true);
 		expect(getUserTexts(harness)).toEqual(["hello", "conflict report"]);
+		expect(
+			harness.session.messages.some((message) => message.role === "custom" && message.customType === "status"),
+		).toBe(true);
 	});
 });
diff --git a/packages/coding-agent/test/suite/agent-session-retry-events.test.ts b/packages/coding-agent/test/suite/agent-session-retry-events.test.ts
index 946f4da9e..073db9422 100644
--- a/packages/coding-agent/test/suite/agent-session-retry-events.test.ts
+++ b/packages/coding-agent/test/suite/agent-session-retry-events.test.ts
@@ -52,6 +52,41 @@ describe("AgentSession retry and event characterization", () => {
 		expect(harness.session.isRetrying).toBe(false);
 	});
 
+	it("retries when an excluded custom message follows the transient error", async () => {
+		const harness = await createHarness({
+			settings: { retry: { enabled: true, maxRetries: 3, baseDelayMs: 1 } },
+			extensionFactories: [
+				(pi) => {
+					let sent = false;
+					pi.on("message_end", async (event) => {
+						if (sent || event.message.role !== "assistant" || event.message.stopReason !== "error") return;
+						sent = true;
+						pi.sendMessage({
+							customType: "status",
+							content: "display only",
+							display: true,
+							details: {},
+							excludeFromContext: true,
+						});
+					});
+				},
+			],
+		});
+		harnesses.push(harness);
+		harness.setResponses([
+			fauxAssistantMessage("", { stopReason: "error", errorMessage: "overloaded_error" }),
+			fauxAssistantMessage("recovered"),
+		]);
+
+		await harness.session.prompt("test");
+
+		expect(harness.faux.state.callCount).toBe(2);
+		expect(
+			harness.session.messages.some((message) => message.role === "custom" && message.customType === "status"),
+		).toBe(true);
+		expect(harness.session.messages[harness.session.messages.length - 1]?.role).toBe("assistant");
+	});
+
 	it("retries multiple transient failures and succeeds on the final attempt", async () => {
 		const harness = await createHarness({ settings: { retry: { enabled: true, maxRetries: 3, baseDelayMs: 1 } } });
 		harnesses.push(harness);