diff --git a/internal/compiler/compiler.go b/internal/compiler/compiler.go
index 6e13b66..c09f671 100644
--- a/internal/compiler/compiler.go
+++ b/internal/compiler/compiler.go
@@ -2,6 +2,7 @@ package compiler
 
 import (
 	"fmt"
+	"os"
 	"strings"
 
 	"c65gm/internal/preproc"
@@ -37,7 +38,7 @@ func (c *Compiler) Compile(lines []preproc.Line) ([]string, error) {
 	var lastKind = preproc.Source
 	var scriptBuffer []string
 
-	for _, line := range lines {
+	for i, line := range lines {
 		// Detect kind transitions and emit markers
 		if line.Kind != lastKind {
 			// Execute and close previous Script block
@@ -78,7 +79,8 @@ func (c *Compiler) Compile(lines []preproc.Line) ([]string, error) {
 					}
 					end := strings.IndexByte(text[start+1:], '|')
 					if end == -1 {
-						return nil, fmt.Errorf("%s:%d: unclosed | in assembler line", line.Filename, line.LineNo)
+						c.printErrorWithContext(lines, i, fmt.Errorf("unclosed | in assembler line"))
+						return nil, fmt.Errorf("compilation failed")
 					}
 					end += start + 1
 
@@ -102,18 +104,21 @@ func (c *Compiler) Compile(lines []preproc.Line) ([]string, error) {
 		// Find handler for this line
 		cmd, found := c.registry.FindHandler(line)
 		if !found {
-			return nil, &UnhandledLineError{Line: line}
+			c.printErrorWithContext(lines, i, fmt.Errorf("unhandled line (no matching command)"))
+			return nil, fmt.Errorf("compilation failed")
 		}
 
 		// Interpret the line
 		if err := cmd.Interpret(line, c.ctx); err != nil {
-			return nil, fmt.Errorf("%s:%d: %w", line.Filename, line.LineNo, err)
+			c.printErrorWithContext(lines, i, err)
+			return nil, fmt.Errorf("compilation failed")
 		}
 
 		// Generate assembly
 		asmLines, err := cmd.Generate(c.ctx)
 		if err != nil {
-			return nil, fmt.Errorf("%s:%d: %w", line.Filename, line.LineNo, err)
+			c.printErrorWithContext(lines, i, err)
+			return nil, fmt.Errorf("compilation failed")
 		}
 
 		codeOutput = append(codeOutput, fmt.Sprintf("; %s", line.Text))
@@ -136,6 +141,70 @@ func (c *Compiler) Compile(lines []preproc.Line) ([]string, error) {
 	return c.assembleOutput(codeOutput), nil
 }
 
+// printErrorWithContext prints an error with source code context to stderr
+func (c *Compiler) printErrorWithContext(lines []preproc.Line, lineIndex int, err error) {
+	if lineIndex < 0 || lineIndex >= len(lines) {
+		// Shouldn't happen, but be safe
+		_, _ = fmt.Fprintf(os.Stderr, "Error: %v\n", err)
+		return
+	}
+
+	line := lines[lineIndex]
+	const contextLines = 3
+
+	// Print error header
+	_, _ = fmt.Fprintf(os.Stderr, "\nError: %v\n", err)
+	_, _ = fmt.Fprintf(os.Stderr, "  --> %s:%d\n\n", line.Filename, line.LineNo)
+
+	// Find all lines from the same file for context
+	// Group consecutive lines from the same file
+	fileLines := make(map[string][]int)
+	for i, l := range lines {
+		if l.Filename == line.Filename {
+			fileLines[l.Filename] = append(fileLines[l.Filename], i)
+		}
+	}
+
+	// Get context range (lineIndex within our lines array)
+	startIdx := lineIndex - contextLines
+	if startIdx < 0 {
+		startIdx = 0
+	}
+	endIdx := lineIndex + contextLines
+	if endIdx >= len(lines) {
+		endIdx = len(lines) - 1
+	}
+
+	// Calculate width for line numbers based on actual source line numbers
+	maxLineNo := 0
+	for i := startIdx; i <= endIdx; i++ {
+		if lines[i].LineNo > maxLineNo {
+			maxLineNo = lines[i].LineNo
+		}
+	}
+	maxLineNumWidth := len(fmt.Sprintf("%d", maxLineNo))
+
+	// Print context
+	for i := startIdx; i <= endIdx; i++ {
+		l := lines[i]
+
+		// Skip lines from different files
+		if l.Filename != line.Filename {
+			continue
+		}
+
+		if i == lineIndex {
+			// Error line - highlight it
+			_, _ = fmt.Fprintf(os.Stderr, ">> %*d | %s\n", maxLineNumWidth, l.LineNo, l.Text)
+		} else {
+			// Context line
+			_, _ = fmt.Fprintf(os.Stderr, "   %*d | %s\n", maxLineNumWidth, l.LineNo, l.Text)
+		}
+	}
+
+	_, _ = fmt.Fprintf(os.Stderr, "\n")
+}
+
 // checkAbsoluteOverlaps analyzes and warns about overlapping absolute addresses
 func (c *Compiler) checkAbsoluteOverlaps() {
 	c.ctx.FunctionHandler.ReportAbsoluteOverlaps()