diff --git a/examples/Hazard3/Hazard3-vlindex.sh b/examples/Hazard3/Hazard3-vlindex.sh
index 908c4a92a..a10e1dcdc 100755
--- a/examples/Hazard3/Hazard3-vlindex.sh
+++ b/examples/Hazard3/Hazard3-vlindex.sh
@@ -29,6 +29,6 @@ Number of functions.......: 7
 Number of tasks...........: 0
 Number of properties......: 0
 Number of sequences.......: 0
-Number of module instances: 71
+Number of module instances: 70
 Number of configurations..: 0
 EOM
diff --git a/regression/verilog/preprocessor/include3.desc b/regression/verilog/preprocessor/include3.desc
index 56ea68861..a5d3ec9d5 100644
--- a/regression/verilog/preprocessor/include3.desc
+++ b/regression/verilog/preprocessor/include3.desc
@@ -1,13 +1,7 @@
-KNOWNBUG
-include2.v
+CORE
+include3.v
 --preprocess
-// Enable multi-line checking
-activate-multi-line-match
-`line 1 "include3\.v" 0
-`line 1 "include_file2\.vh" 1
-
-`line 2 "include3\.v" 2
-^EXIT=0$
+^file include3.v line 2: preprocessor directive inside `include directive$
+^EXIT=1$
 ^SIGNAL=0$
 --
-Giving the include file name as a macro doesn't work.
diff --git a/src/verilog/verilog_preprocessor.cpp b/src/verilog/verilog_preprocessor.cpp
index 5c7913755..19700ce14 100644
--- a/src/verilog/verilog_preprocessor.cpp
+++ b/src/verilog/verilog_preprocessor.cpp
@@ -572,34 +572,49 @@ void verilog_preprocessort::directive()
     // skip whitespace
     tokenizer().skip_ws();
 
-    // We expect one of:
+    std::string argument;
+
+    // Read any tokens until end of line.
+    // 1800-2017 is silent on whether further directives are
+    // processed. We emit an error.
+    // 1800-2017 is silent wether file names in quotes are processed
+    // as string literals. We assume not so.
+    while(!tokenizer().eof() && tokenizer().peek() != '\n')
+    {
+      auto token = tokenizer().next_token();
+
+      if(token == '`')
+      {
+        throw verilog_preprocessor_errort()
+          << "preprocessor directive inside `include directive";
+      }
+
+      argument += token.text;
+    }
+
+    // We expect the argument to be one of:
     // <filename> -- include paths only
     // "filename" -- relative path, then include paths.
     std::string given_filename;
     bool include_paths_only;
 
-    if(tokenizer().peek().is_string_literal())
+    if(!argument.empty() && argument[0] == '"')
     {
       include_paths_only = false;
-      const auto file_token = tokenizer().next_token();
-      CHECK_RETURN(file_token.is_string_literal());
-      // strip quotes off string literal, escaping, etc.
-      given_filename = file_token.string_literal_value();
+      auto quote_pos = argument.find('"', 1);
+      if(quote_pos == std::string::npos)
+        throw verilog_preprocessor_errort()
+          << "expected closing \" in include directive";
+      given_filename = std::string(argument, 1, quote_pos - 1);
     }
-    else if(tokenizer().peek() == '<')
+    else if(!argument.empty() && argument[0] == '<')
     {
-      tokenizer().next_token(); // <
       include_paths_only = true;
-
-      while(tokenizer().peek() != '>')
-      {
-        if(tokenizer().peek().is_eof())
-          throw verilog_preprocessor_errort() << "eof in include directive";
-
-        given_filename += tokenizer().next_token().text;
-      }
-
-      tokenizer().next_token(); // >
+      auto quote_pos = argument.find('>', 1);
+      if(quote_pos == std::string::npos)
+        throw verilog_preprocessor_errort()
+          << "expected closing > in include directive";
+      given_filename = std::string(argument, 1, quote_pos - 1);
     }
     else
     {