<PAGE>

                                                                Exhibit 10.3
                                                                ------------


                                READING COMPANY
                                ---------------

                         NONQUALIFIED STOCK OPTION PLAN
                         ------------------------------


1.   Purpose.  The purpose of the Reading Company Nonqualified Stock Option Plan
     -------
     (the "Plan") is to further the growth, development and financial success of
     Reading Company (the "Company") and any subsidiary by providing additional
     incentives to those officers, key employees and outside directors who are
     responsible for the management of the business affairs of the Company and
     any subsidiary, and which will enable them to participate directly in the
     growth of the capital stock of the Company.  The Company intends that the
     Plan will facilitate securing, retaining, and motivating management
     employees and outside directors of high caliber and potential.

2.   Administration.
     --------------

          (a) The Executive Committee of the Company's Board of Directors (the
     "Board") shall, subject to the provisions of the Plan, have full and final
     authority, in its sole discretion, to interpret the provisions of the Plan
     and to decide all questions of fact arising in its application; to
     determine the employees and outside directors to whom options shall be
     granted under the Plan; to determine the time when options shall be
     granted; and to make all other determinations necessary or advisable for
     the administration of the Plan.

          (b) All decisions, determinations, and interpretations of the
     Executive Committee (the "Committee") shall be final and binding on all
     optionees.  All actions of the Committee shall be taken by a majority vote
     of its members.  The Committee may appoint a secretary to keep minutes of
     its meetings and shall make rules and regulations for their conduct as it
     shall deem advisable.

3.   Stock Subject to the Plan.  The shares that may be issued under the Plan
     -------------------------
     shall not exceed in the aggregate 500,000 shares of Class A common stock,
     par value $.01, of the Company (the "Common Stock").  Such shares may be
     authorized and unissued shares or shares issued and subsequently reacquired
     by the Company. Except as otherwise provided herein, any shares subject to
     an option which for any reason expires or is terminated unexercised as to
     such shares shall again be available under the Plan.  The Committee may
     grant to holders of outstanding options, in exchange for the surrender and
     cancellation of such options, new options having purchase prices lower than
     provided in the options so surrendered and cancelled, and containing such
     other terms and conditions as the Committee may prescribe in accordance
     with the provisions of the Plan, without regard to the price, period of
     exercise, or any other terms or conditions of the option surrendered.
     Shares delivered under the Plan shall be fully paid and non-assessable.

4.   Eligibility to Receive Options.  Persons eligible to receive stock options
     ------------------------------
     under the Plan shall be limited to those officers, key employees and
     directors of the Company and any subsidiary (as defined in Section 424 of
     the Internal Revenue Code of 1986 (the "Code"), or any amendment or
     substitute thereto), who are in positions in which their decisions, actions
     and counsel significantly impact upon the profitability and success of the
     Company and any subsidiary.

5.   Form of Grants.  Grants may be made at any time and from time to time by
     --------------
     the Committee in the form of stock options to purchase shares of Common
     Stock.  These stock options are not intended to qualify as incentive stock
     options within the meaning of Section 422 of the Code.

6.   Stock Option Agreements.  Stock options for the purchase of Common Stock
     -----------------------
     ("Options") shall be evidenced by written agreements in such form not
     inconsistent with the Plan as the Committee shall approve from time to time
     and which shall contain in substance the following terms and conditions:

     (a) Type of Option.  Each option agreement shall identify the Options
         --------------
     represented thereby as nonqualified stock options.

     (b) Option Price.  The purchase price of the Common Stock subject to an
         ------------
     Option shall not be less than 100% of the fair market value of such stock
     on the date the Option is granted, as determined by the Committee.  In no
     event shall the purchase price per share be less than the par value of such
     share.  For this purpose, fair market value on any date shall mean the
     closing price of the Common Stock,
<PAGE>

     as reported in the Wall Street Journal (or if not so reported, as otherwise
     reported by the National Association of Securities Dealers Automated
     Quotation (NASDAQ) System), or if the Common Stock is not reported by
     NASDAQ, the fair market value shall be as determined by the Committee.

     (c) Exercise Term.  Unless the Committee in its discretion determines
         -------------
     otherwise, each option agreement shall state that the Option is exercisable
     in three (3) cumulative installments with one-third (1/3) of the shares
     covered by the Option becoming exercisable commencing on the date of grant
     and another one-third (1/3) of such shares becoming exercisable on each
     anniversary of the date of grant thereafter until the Option becomes fully
     exercisable.  Moreover, the Committee, in its discretion, may have each
     option agreement provide that any unexercisable portion of the Option will
     become exercisable at the time an optionee ceases to be an employee of the
     Company or any subsidiary for any reason other than resignation or a
     discharge for cause or at the time an optionee no longer serves as a member
     of the Board for any reason other than resignation or removal for cause.
     Anything in the foregoing to the contrary notwithstanding, no Option shall
     be exercisable after ten years from the date of grant thereof and no Option
     shall be exercisable with respect to fractional shares.  Subject to the
     foregoing, the Committee shall have the power, at or prior to the time
     Options are granted, to determine in its discretion any conditions to be
     met before Options become exercisable with respect to all or any part of
     the shares covered thereby, including the time or times of exercise and
     performance standards to be met by the optionees.  The Committee shall have
     the power to permit an acceleration of previously established exercise
     terms, subject to the requirements set forth herein, upon such
     circumstances and subject to such terms and conditions as the Committee
     deems appropriate.

     (d) Exercise and Payment for Shares.  Options may be exercised in whole or
         -------------------------------
     in part, from time to time, by giving written notice of exercise to the
     Secretary or his office, specifying the number of shares to be purchased.
     The purchase price of the shares with respect to which an Option is
     exercised shall be payable in full with the notice of exercise by certified
     check, by delivery of shares of Common Stock already owned by the optionee
     at fair market value, including shares obtained through exercise of an
     Option granted hereunder, or a combination thereof, as the Committee may
     determine from time to time and subject to such terms and conditions as may
     be prescribed by the Committee for such purpose.

     (e) Conditions Upon Issuance of Shares.  Shares shall not be issued
         ----------------------------------
     pursuant to the exercise of an Option unless the exercise of such Option
     and the issuance and delivery of such shares pursuant thereto shall comply
     with all relevant provisions of law, including, without limitation, the
     Securities Act of 1933, as amended, the Securities and Exchange Act of 1934
     (the "Exchange Act"), the rules and regulations promulgated thereunder and
     the requirements of any stock exchange upon which the Common Stock may then
     be listed, and shall be further subject to the approval of counsel for the
     Company with respect to such compliance.  As a condition to the exercise of
     an Option, the Company may require the person exercising such Option to
     represent and warrant at the time of any such exercise that the shares are
     being purchased only for investment and without any present intention to
     sell or distribute such sharesif, in the opinion of counsel for the
     Company, such a representation is required by any of the aforementioned
     relevant provisions of law.

     (f) Rights Upon Termination of Service.  In the event an optionee resigns
         ----------------------------------
     as an employee of the Company or any subsidiary or as a director of the
     Company or is discharged by the Company or any subsidiary for cause or is
     removed as a director for cause,  the Optionee shall have no further right
     to exercise the Option following such resignation, discharge or removal.
     In the event that an optionee ceases to be an employee of the Company or
     any subsidiary for any reason other than resignation or a discharge for
     cause or in the event that an optionee no longer serves as a member of the
     Board for any reason other than resignation or removal for cause, the
     optionee shall have the right to exercise the Option within a period of
     sixty (60) days after such termination of employment or such termination of
     service on the Board (but in no event after the expiration of the term of
     the Option) to the extent that the Option was exercisable at the time of
     such termination, or within such other period, and subject to such terms
     and conditions, as may be specified by the Committee.

     (g) Nontransferability.  Each option agreement shall state that the Option
         ------------------
     is not transferable other than by will or by the laws of descent and
     distribution, and that during the lifetime of the optionee the Option is
     exercisable only by him.

                                      -2-
<PAGE>

     (h) Substitution of Options.  Options may be granted under the Plan from
         -----------------------
     time to time in substitution for stock options held by employees of other
     corporations who are about to become and who do concurrently with the grant
     of such options become employees of the Company or a subsidiary as a result
     of a merger or consolidation of the employing corporation with the Company
     or a subsidiary, or the acquisition by the Company or a subsidiary of the
     assets of the employing corporation or the acquisition by the Company or a
     subsidiary of the stock of the employing corporation.  The terms and
     conditions of the substitute options so granted may vary from the terms and
     conditions set forth in this Section 6 of the Plan to such extent as the
     Committee at the time of grant may deem appropriate to conform, in whole or
     in part, to the provisions of the stock options in substitution for which
     they are granted.

     (i) Other Provisions.  Each option agreement shall contain such other
         ----------------
     provisions not inconsistent with the Plan as the Committee shall deem
     advisable.

7. Date of Grant.  The initial grant of Options under this Plan shall be made on
   -------------
   the effective date set forth in Section 23(f), below.  Thereafter, the date
   on which an Option shall be deemed to have been granted under this Plan shall
   be the date of the Committee's authorization of the Option or such later date
   as may be determined by the Committee at the time the Option is authorized.
   Notice of the determination shall be given to each individual to whom an
   Option is so granted within a reasonable time after the date of such grant.

8. General Restrictions.  Each Option under the Plan shall be subject to the
   --------------------
   requirement that if at any time the Committee shall determine that (i) the
   listing, registration or qualification of the shares of Common Stock subject
   or related thereto upon any securities exchange or under any state or federal
   law, or (ii) the consent or approval of any government regulatory body, or
   (iii) an agreement by the recipient of an Option with respect to the
   disposition of shares of Common Stock is necessary or desirable as a
   condition of or in connection with the granting of such Option or the
   issuance or purchase of shares of Common Stock thereunder, such Option shall
   not be consummated in whole or in part unless such listing, registration,
   qualification, consent, approval, or agreement shall have been effected or
   obtained free of any conditions not acceptable to the Committee.

9. Single or Multiple Agreements.  The Options granted hereunder may be
   -----------------------------
   evidenced by a single agreement or by multiple agreements, as determined by
   the Committee, in its sole discretion.

10. Rights of a Shareholder.  The recipient of any Option under the Plan, unless
    -----------------------
    otherwise provided by the Plan, shall have no rights as a shareholder with
    respect thereto unless and until certificates for shares of Common Stock are
    issued and delivered to him.

11. Right to Terminate Service.  Nothing in the Plan nor in any agreement
    --------------------------
    entered into pursuant to the Plan shall confer upon any optionee the right
    to continue in the service of the Company or any subsidiary or affect any
    right which the Company or any subsidiary may have to terminate the
    employment of such optionee.

12. Withholding.  Whenever the Company proposes or is required to issue or
    -----------
    transfer shares of Common Stock under the Plan, the Company shall have the
    right to require the recipient to remit to the Company an amount sufficient
    to satisfy any federal, state or local withholding tax requirements prior to
    the delivery of any certificate or certificates for such shares.  Whenever
    under the Plan payments are to be made in cash, such payments shall be net
    of an amount sufficient to satisfy any federal, state or local withholding
    tax requirements.  If and to the extent authorized by the Committee, in its
    sole discretion, an optionee may make an election, by means of a form of
    election to be prescribed by the Committee, to have shares of Common Stock
    which are acquired upon exercise of an Option withheld by the Company or to
    tender other shares of Common Stock or other securities of the Company owned
    by the optionee to the Company at the time of exercise of an Option to pay
    the amount of tax that would otherwise be required by law to be withheld by
    the Company as a result of any exercise of an Option from amounts payable to
    such optionee.  Any such election shall be irrevocable and shall be subject
    to the disapproval of the Committee at any time.  Any securities so withheld
    or tendered will be valued by the Committee as of the date of exercise.

13. Non-Assignability.  No Option under the Plan shall be assignable or
    -----------------
    transferable by the recipient thereof except by will or by the laws of
    descent and distribution or by such other means as the Committee may
    approve.  During the life of the recipient such Option shall be exercisable
    only by such person or by such person's guardian or legal representative.

                                      -3-
<PAGE>

14. Non-Uniform Determinations.  The Committee's determinations under the Plan
    --------------------------
    (including without limitation determinations of the persons to receive
    grants of Options, the form, amount and timing of such grants, the terms and
    provisions of such grants, and the agreements evidencing same) need not be
    uniform and may be made selectively among persons who receive, or are
    eligible to receive, grants of Options under the Plan whether or not such
    persons are similarly situated.

15. Adjustments Upon Changes in Capitalization or Merger.  Subject to any
    ----------------------------------------------------
    required action by the stockholders of the Company, the number of shares of
    Common Stock covered by each outstanding Option and the number of shares of
    Common Stock which have been authorized for issuance under the Plan but as
    to which no Options have yet been granted or which have been returned to the
    Plan upon cancellation or expiration of an Option, as well as the price per
    share of Common Stock covered by each such outstanding Option, shall be
    proportionately adjusted for any increase or decrease in the number of
    issued shares of Common Stock resulting from a stock split, reverse stock
    split, stock dividend, combination or reclassification of the Common Stock,
    or any other increase or decrease in the number of issued shares of Common
    Stock effected without receipt of consideration by the Company; provided,
    however, that conversion of any convertible securities of the Company shall
    not be deemed to have been "effected without receipt of consideration."
    Such adjustment shall be made by the Committee, whose determination in that
    respect shall be final, binding and conclusive.  Except as expressly
    provided herein, no issuance by the Company of shares of stock of any class,
    or securities convertible into shares of stock of any class, shall affect,
    and no adjustment by reason thereof shall be made with respect to, the
    number or price of shares of Common Stock subject to an Option.

    In the event of the proposed dissolution or liquidation of the Company, the
    Committee shall declare that each outstanding Option shall terminate as of a
    date fixed by the Committee and shall give each optionee the right to
    exercise his Option as to all or any part of the optioned Common Stock,
    including shares as to which the Option would not otherwise be exercisable.
    In the event of the merger of the Company or any subsidiary with or into
    another corporation, the affected Options shall be assumed or an equivalent
    option shall be substituted by such successor corporation or a parent or
    subsidiary of such successor corporation, provided that the successor
    corporation consents to such assumption or substitution. Moreover, the
    Committee may determine, in the exercise of its sole discretion and in lieu
    of such assumption or substitution, that the affected optionees shall have
    the right to exercise their Options as to all of the optioned Common Stock,
    including shares as to which the Option would not otherwise be exercisable.
    If the Committee makes an Option fully exercisable in lieu of assumption or
    substitution in the event of a merger or sale of assets, the Committee shall
    notify the optionee that the Option shall be fully exercisable for a period
    of thirty (30) days from the date of such notice, and the Option will
    terminate upon the expiration of such period.

16. Amendment or Termination.  The Committee may terminate or amend the Plan at
    ------------------------
    any time.  The termination or any modification or amendment of the Plan
    shall not, without the consent of an optionee, affect his rights under an
    Option previously granted.

17. Effect on Other Plans.  Participation in this Plan shall not affect any
    ---------------------
    employee's eligibility to participate in any other benefit or incentive plan
    of the Company or any subsidiary.  Any Options granted pursuant to this Plan
    shall not be used in determining the benefits provided under any other plan
    of the Company or any subsidiary unless specifically provided.

18. Duration of the Plan.  The Plan shall remain in effect until all Options
    --------------------
    granted under the Plan have been satisfied by the issuance of shares, but no
    Option shall be granted more than ten years after the earlier of the date
    the Plan is adopted by the Company or is approved by the Company's
    shareholders.

19. Forfeiture for Dishonesty.  Notwithstanding anything to the contrary in this
    -------------------------
    Plan, if the Committee finds, by a majority vote, after full consideration
    of the facts presented on behalf of both the Company and any optionee, that
    the optionee has been engaged in fraud, embezzlement, theft, commission of a
    felony or other dishonest conduct which damaged the Company or any
    subsidiary or that the optionee has disclosed trade secrets of the Company
    or any subsidiary, the optionee shall forfeit all unexercised Options and
    all exercised Options under which the Company has not yet delivered the
    certificates.  The decision of the Committee as to the cause of an
    optionee's discharge and the damage done to the Company or any subsidiary
    shall be final.  No decision of the Committee, however, shall affect the
    finality of the discharge of such optionee by the Company or any subsidiary
    in any manner.

                                      -4-
<PAGE>

20. No Prohibition on Corporate Action.  No provision of this Plan shall be
    ----------------------------------
    construed to prevent the Company or any officer or director thereof from
    taking any corporate action deemed by the Company or such officer or
    director to be appropriate or in the Company's best interest, whether or not
    such action could have an adverse effect on the Plan or any Options granted
    hereunder, and no optionee or optionee's estate, personal representative or
    beneficiary shall have any claim against the Company or any officer or
    director thereof as a result of the taking of such action.

21. Use of Proceeds.  The proceeds received by the Company from the exercise of
    ---------------
    any Option issued pursuant to the Plan shall be used for general corporate
    purposes.

22. Indemnification.  With respect to the administration of the Plan, the
    ---------------
    Company shall indemnify each present and future member of the Committee and
    the Board against, and each member of the Committee and the Board shall be
    entitled without further act on his part to indemnity from the Company for
    all expenses (including the amount of judgments and the amount of approved
    settlements made with a view to the curtailment of costs of litigation,
    other than amounts paid to the Company itself) reasonably incurred by him in
    connection with or arising out of, any action, suit or proceeding in which
    he may be involved by reason of his being or having been a member of the
    Committee and the Board, whether or not he continues to be such member of
    the Committee and the Board at the time of incurring such expenses;
    provided, however, that such indemnity shall not include any expenses
    incurred by any such member of the Committee and the Board (i) in respect of
    matters as to which he shall be finally adjudged in any such action, suit or
    proceeding to have been guilty of gross negligence or willful misconduct in
    the performance of his duty as such member of the Committee and the Board;
    or (ii) in respect of any matter in which any settlement is effected for an
    amount in excess of the amount approved by the Company on the advice of its
    legal counsel; and provided further that no right of indemnification under
    the provisions set forth herein shall be available to or enforceable by any
    such member of the Committee and the Board unless within 60 days after
    institution of any such action, suit or proceeding, he shall have offered
    the Company in writing the opportunity to handle and defend same at its own
    expense.  The foregoing right of indemnification shall inure to the benefit
    of the heirs, executors or administrators of each such member of the
    Committee and the Board and shall be in addition to all other rights to
    which such member of the Committee and the Board may be entitled as a matter
    of law, contract or otherwise.

23. Miscellaneous Provisions.
    ------------------------

       (a) No optionee or other person shall have any right with respect to the
  Plan, the Common Stock reserved for issuance under the Plan or in any Option
  until written evidence of the Option shall have been delivered to the optionee
  and all the terms, conditions and provisions of the Plan and the Option
  applicable to such optionee (and each person claiming under or through him)
  have been met.

       (b) No shares of Common Stock, other securities or property of the
  Company, or other forms of payment shall be issued hereunder with respect to
  any Option unless counsel for the Company shall be satisfied that such
  issuance will be in compliance with applicable federal, state, local and
  foreign legal, securities exchange and other applicable requirements.

       (c) The Plan shall be unfunded.  The Company shall not be required to
  establish any special or separate fund or to make any other segregation of
  assets to assure the payment of any Option under the Plan, and rights to the
  payment of Options shall be no greater than the rights of the Company's
  general creditors.

       (d) By accepting any Option or other benefit under the Plan, each
  optionee and each person claiming under or through him shall be conclusively
  deemed to have indicated his acceptance and ratification of, and consent to,
  any action taken under the Plan by the Company, the Board or the Committee or
  its delegates.

       (e) The masculine pronoun shall include the feminine and neuter, and the
  singular shall include the plural, where the context so indicates.

       (f) This Plan shall be effective as of May 4, 1992, subject to the
  approval of the Company's shareholders at the first annual meeting of
  shareholders next following such effective date.  If the

                                      -5-
<PAGE>

  shareholders do not approve the Plan, the Plan shall not be effective. No
  Option shall be granted pursuant to this Plan after May 3, 2002.

  TO RECORD the adoption of this Plan, the Board has caused this instrument to
be executed on this 4th day of May, 1992.


                                READING COMPANY


                                By: /s/ James J. Cotter
                                   ---------------------------------
                                    Chairman

                                      -6-
<PAGE>

                          READING ENTERTAINMENT, INC.
                          ---------------------------

          AMENDMENTS TO READING COMPANY NONQUALIFIED STOCK OPTION PLAN
          ------------------------------------------------------------

     The 1992 Nonqualified Stock Option Plan (the "Plan") of Reading Company
("Reading"), as previously adopted and assumed by Reading Entertainment, Inc.
("Reading Entertainment" or the "Company"), is hereby amended as follows:

     i.   To reflect the assumption of the Plan by Reading Entertainment, (a)
          the reference to "Reading Company" in Section 1 of the Plan is deleted
          and the phrase "Reading Entertainment, Inc." is inserted in its stead
          and (b) the phrase "Class A common stock, par value $.01" is deleted
          and the phrase "Common Stock, par value $.001 per share" is inserted
          in its stead.

     ii.  The phrase "Executive Committee" in Sections 2(a) and (b) is hereby
          deleted and the phrase "Compensation Committee" is inserted in its
          stead.

     iii. The first sentence of Section 6(c) is amended in its entirety to read
          as follows:

     Unless the Committee in its discretion determines otherwise, each option
     agreement shall state that the Option is exercisable in four (4) cumulative
     installments with one-fourth (1/4) of the shares covered by the Option
     becoming exercisable commencing on the first anniversary of the date of
     grant and another one-fourth (1/4) of such shares becoming exercisable on
     each anniversary of the date of grant thereafter until the Option becomes
     fully exercisable.

     iv.  Section 6(f) is amended in its entirety to read as follows:

     (f)  Rights Upon Termination of Service.  Unless otherwise provided by the
          ----------------------------------
          Committee (at the time of grant of an Option, the time of termination
          of employment, or otherwise), (i) in the event an optionee resigns as
          an employee of the Company or any subsidiary or as a director of the
          Company or is discharged by the Company or any subsidiary for cause or
          is removed as a director for cause, the Optionee shall have no further
          right to exercise the Option following such resignation, discharge or
          removal, and (ii) in the event that an optionee ceases to be an
          employee of the Company or any subsidiary for any reason other than
          resignation or a discharge for cause or in the event that an optionee
          no longer serves as a member of the Board for any reason other than
          resignation or removal for cause, the optionee shall have the right to
          exercise the Option within a period of sixty (60) days after such
          termination of employment or such termination of service on the Board
          (but in no event after the expiration of the term of the Option) to
          the extent that the Option was exercisable at the time of such
          termination.

     v.   This Amendment shall be effective when adopted by the Board of
          Directors.  This Amendment shall not affect the rights of an option
          holder under any option previously granted.

     TO RECORD the adoption of this Amendment, the Board has caused this
instrument to be executed on this 16/th/ day of November, 1997.

                                    READING ENTERTAINMENT, INC.



                                    By:  /s/ James J. Cotter
                                       --------------------------------
                                          Chairman

                                      -7-