diff --git a/src/systems/generation/inventoryParser.js b/src/systems/generation/inventoryParser.js
new file mode 100644
index 0000000..f56e28d
--- /dev/null
+++ b/src/systems/generation/inventoryParser.js
@@ -0,0 +1,132 @@
+/**
+ * Inventory Parser Module
+ * Extracts v2 inventory data from AI-generated text
+ */
+
+// Type imports
+/** @typedef {import('../../types/inventory.js').InventoryV2} InventoryV2 */
+
+/**
+ * Extracts inventory data from AI-generated stats text in v2 multi-line format.
+ *
+ * Expected format from AI:
+ * ```
+ * On Person: Sword (equipped), 3x Health Potions, Leather Armor
+ * Stored - Home: Spare clothes, Tools, 50 gold coins
+ * Stored - Bank: Family heirloom, Important documents
+ * Assets: Motorcycle (garage), Downtown apartment (owned)
+ * ```
+ *
+ * @param {string} statsText - Raw stats text from AI response
+ * @returns {InventoryV2|null} Parsed inventory v2 object or null if not found
+ */
+export function extractInventoryData(statsText) {
+    if (!statsText || typeof statsText !== 'string') {
+        return null;
+    }
+
+    const result = {
+        version: 2,
+        onPerson: "None",
+        stored: {},
+        assets: "None"
+    };
+
+    let foundAnyInventoryData = false;
+
+    // Split into lines for parsing
+    const lines = statsText.split('\n');
+
+    for (const line of lines) {
+        const trimmed = line.trim();
+
+        // Parse "On Person: ..." line
+        const onPersonMatch = trimmed.match(/^On Person:\s*(.+)$/i);
+        if (onPersonMatch) {
+            result.onPerson = onPersonMatch[1].trim() || "None";
+            foundAnyInventoryData = true;
+            continue;
+        }
+
+        // Parse "Stored - [Location]: ..." lines
+        const storedMatch = trimmed.match(/^Stored\s*-\s*([^:]+):\s*(.+)$/i);
+        if (storedMatch) {
+            const locationName = storedMatch[1].trim();
+            const items = storedMatch[2].trim();
+            if (locationName && items) {
+                result.stored[locationName] = items;
+                foundAnyInventoryData = true;
+            }
+            continue;
+        }
+
+        // Parse "Assets: ..." line
+        const assetsMatch = trimmed.match(/^Assets:\s*(.+)$/i);
+        if (assetsMatch) {
+            result.assets = assetsMatch[1].trim() || "None";
+            foundAnyInventoryData = true;
+            continue;
+        }
+    }
+
+    // Return null if we didn't find any inventory data
+    return foundAnyInventoryData ? result : null;
+}
+
+/**
+ * Attempts to parse legacy v1 inventory format (single line).
+ * Fallback for old AI responses that haven't been updated to v2 format.
+ *
+ * Expected format: "Inventory: Sword, Shield, 3x Potions, Gold coins"
+ *
+ * @param {string} text - Text that may contain legacy inventory
+ * @returns {string|null} Legacy inventory string or null
+ */
+export function extractLegacyInventory(text) {
+    if (!text || typeof text !== 'string') {
+        return null;
+    }
+
+    // Match old single-line format: "Inventory: ..."
+    const match = text.match(/Inventory:\s*(.+?)(?:\n|$)/i);
+    if (match && match[1]) {
+        const inventoryText = match[1].trim();
+        // Return null for empty values like "None" or ""
+        if (!inventoryText || inventoryText.toLowerCase() === 'none') {
+            return null;
+        }
+        return inventoryText;
+    }
+
+    return null;
+}
+
+/**
+ * Main inventory extraction function that tries v2 format first, then falls back to v1.
+ * Converts v1 format to v2 automatically if found.
+ *
+ * @param {string} statsText - Raw stats text from AI response
+ * @returns {InventoryV2|null} Parsed inventory in v2 format or null
+ */
+export function extractInventory(statsText) {
+    // Try v2 format first
+    const v2Data = extractInventoryData(statsText);
+    if (v2Data) {
+        return v2Data;
+    }
+
+    // Fallback to v1 format and convert to v2
+    const v1Data = extractLegacyInventory(statsText);
+    if (v1Data) {
+        // Convert v1 string to v2 format (place in onPerson)
+        return {
+            version: 2,
+            onPerson: v1Data,
+            stored: {},
+            assets: "None"
+        };
+    }
+
+    // No inventory data found
+    return null;
+}
diff --git a/src/systems/generation/parser.js b/src/systems/generation/parser.js
index af8713e..60c6b70 100644
--- a/src/systems/generation/parser.js
+++ b/src/systems/generation/parser.js
@@ -3,8 +3,9 @@
  * Handles parsing of AI responses to extract tracker data
  */
 
-import { extensionSettings } from '../../core/state.js';
+import { extensionSettings, FEATURE_FLAGS } from '../../core/state.js';
 import { saveSettings } from '../../core/persistence.js';
+import { extractInventory } from './inventoryParser.js';
 
 /**
  * Parses the model response to extract the different data sections.
@@ -91,8 +92,19 @@ export function parseUserStats(statsText) {
             }
         }
 
-        // Extract inventory
-        const inventoryMatch = statsText.match(/Inventory:\s*(.+)/i);
+        // Extract inventory - use v2 parser if feature flag enabled, otherwise fallback to v1
+        if (FEATURE_FLAGS.useNewInventory) {
+            const inventoryData = extractInventory(statsText);
+            if (inventoryData) {
+                extensionSettings.userStats.inventory = inventoryData;
+            }
+        } else {
+            // Legacy v1 parsing for backward compatibility
+            const inventoryMatch = statsText.match(/Inventory:\s*(.+)/i);
+            if (inventoryMatch) {
+                extensionSettings.userStats.inventory = inventoryMatch[1].trim();
+            }
+        }
 
         if (healthMatch) extensionSettings.userStats.health = parseInt(healthMatch[1]);
         if (satietyMatch) extensionSettings.userStats.satiety = parseInt(satietyMatch[1]);
@@ -103,9 +115,6 @@ export function parseUserStats(statsText) {
             extensionSettings.userStats.mood = moodMatch[1].trim(); // Emoji
             extensionSettings.userStats.conditions = moodMatch[2].trim(); // Conditions
         }
-        if (inventoryMatch) {
-            extensionSettings.userStats.inventory = inventoryMatch[1].trim();
-        }
 
         saveSettings();
     } catch (error) {
diff --git a/src/systems/generation/promptBuilder.js b/src/systems/generation/promptBuilder.js
index 9e7a5c2..a24135b 100644
--- a/src/systems/generation/promptBuilder.js
+++ b/src/systems/generation/promptBuilder.js
@@ -5,7 +5,56 @@
 
 import { getContext } from '../../../../../../extensions.js';
 import { chat } from '../../../../../../../script.js';
-import { extensionSettings, committedTrackerData } from '../../core/state.js';
+import { extensionSettings, committedTrackerData, FEATURE_FLAGS } from '../../core/state.js';
+
+// Type imports
+/** @typedef {import('../../types/inventory.js').InventoryV2} InventoryV2 */
+
+/**
+ * Builds a formatted inventory summary for AI context injection.
+ * Converts v2 inventory structure to multi-line plaintext format.
+ *
+ * @param {InventoryV2|string} inventory - Current inventory (v2 or legacy string)
+ * @returns {string} Formatted inventory summary for prompt injection
+ * @example
+ * // v2 input: { onPerson: "Sword", stored: { Home: "Gold" }, assets: "Horse", version: 2 }
+ * // Returns: "On Person: Sword\nStored - Home: Gold\nAssets: Horse"
+ */
+export function buildInventorySummary(inventory) {
+    // Handle legacy v1 string format
+    if (typeof inventory === 'string') {
+        return inventory;
+    }
+
+    // Handle v2 object format
+    if (inventory && typeof inventory === 'object' && inventory.version === 2) {
+        let summary = '';
+
+        // Add On Person section
+        if (inventory.onPerson && inventory.onPerson !== 'None') {
+            summary += `On Person: ${inventory.onPerson}\n`;
+        }
+
+        // Add Stored sections for each location
+        if (inventory.stored && Object.keys(inventory.stored).length > 0) {
+            for (const [location, items] of Object.entries(inventory.stored)) {
+                if (items && items !== 'None') {
+                    summary += `Stored - ${location}: ${items}\n`;
+                }
+            }
+        }
+
+        // Add Assets section
+        if (inventory.assets && inventory.assets !== 'None') {
+            summary += `Assets: ${inventory.assets}`;
+        }
+
+        return summary.trim();
+    }
+
+    // Fallback for unknown format
+    return 'None';
+}
 
 /**
  * Generates an example block showing current tracker states in markdown code blocks.
@@ -64,7 +113,18 @@ export function generateTrackerInstructions(includeHtmlPrompt = true, includeCon
             instructions += '- Hygiene: X%\n';
             instructions += '- Arousal: X%\n';
             instructions += '[Mood Emoji]: [Conditions (up to three traits)]\n';
-            instructions += 'Inventory: [Clothing/Armor, Inventory Items (list of important items/none)]\n';
+
+            // Add inventory format based on feature flag
+            if (FEATURE_FLAGS.useNewInventory) {
+                instructions += 'On Person: [Items currently carried/worn, or "None"]\n';
+                instructions += 'Stored - [Location Name]: [Items stored at this location]\n';
+                instructions += '(Add multiple "Stored - [Location]:" lines as needed for different storage locations)\n';
+                instructions += 'Assets: [Vehicles, property, major possessions, or "None"]\n';
+            } else {
+                // Legacy v1 format
+                instructions += 'Inventory: [Clothing/Armor, Inventory Items (list of important items/none)]\n';
+            }
+
             instructions += '```\n\n';
         }
 
@@ -143,8 +203,13 @@ export function generateContextualSummary() {
         // console.log('[RPG Companion] Building stats summary with:', stats);
         summary += `${userName}'s Stats:\n`;
         summary += `Condition: Health ${stats.health}%, Satiety ${stats.satiety}%, Energy ${stats.energy}%, Hygiene ${stats.hygiene}%, Arousal ${stats.arousal}% | ${stats.mood} ${stats.conditions}\n`;
-        if (stats.inventory && stats.inventory !== 'None') {
-            summary += `Inventory: ${stats.inventory}\n`;
+
+        // Add inventory summary using v2-aware builder
+        if (stats.inventory) {
+            const inventorySummary = buildInventorySummary(stats.inventory);
+            if (inventorySummary && inventorySummary !== 'None') {
+                summary += `Inventory:\n${inventorySummary}\n`;
+            }
         }
         // Include classic stats (attributes) and dice roll only if there was a dice roll
         if (extensionSettings.lastDiceRoll) {