<PAGE>
 
As of June 5, 1998
Universal Music & Video Distribution, Inc.
70 Universal City Plaza
Universal City, CA 91608

RE:  Extension and Third Amendment to Playboy Entertainment Group, Inc.
     Distribution Agreement

Ladies and Gentlemen:

Reference is made to that certain letter agreement (the "Original Agreement")
dated as of August 22, 1991 between Uni Distribution Corp., now known as
Universal Music & Video Distribution, Inc. ("UMVD"), and Playboy Video
Enterprises, Inc., the predecessor in interest to Playboy Entertainment Group,
Inc. ("Playboy"), as such letter agreement has been supplemented and amended,
including by (i) that certain letter amendment dated as of March 24, 1995
between UMVD and Playboy (the "First Amendment"), and (ii) that certain letter
amendment dated as of February 28, 1997 between UMVD and Playboy (the "Second
Amendment"; such August 22, 1991 letter agreement, as it has been supplemented
and amended, is referred to as the "Agreement"). All defined terms used in this
third letter amendment (the "Third Amendment") and not defined in this Third
Amendment are defined in the Agreement. UMVD and Playboy desire further to
extend and supplement the Agreement, as follows:

1.  Term. The Term of the Agreement shall be extended to ***, subject
    to extension of the Term for only the New Release Programs pursuant to
    subparagraph 3(a) of the First Amendment, with respect to each contract year
    of the Agreement commencing June 16, 1998.

2.  Distribution Fee. Commencing June 16, 1998, UMVD's Distribution Fee for the
    New Release Programs and the Catalog Programs distributed under the
    Agreement from and after such date, shall be *** (as defined in the
    Agreement), *** , as follows:

    (a) *** If the *** for the New Release Programs (which for purposes of this
        Paragraph 2 shall include *** for the CD-ROMs entitled "Pamela Anderson
        Playmate Portfolio," "Jenny McCarthy Playmate Portfolio," and "Playboy's
        Babes of Baywatch," respectively) and the Catalog Programs for the
        period ***

--------------
*** Confidential information omitted pursuant to a request for confidential 
    treatment filed separately with the Securities and Exchange Commission.
        
                                       1
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         under the Agreement for the New Release Programs and the Catalog
         Programs for the period ***, then UMVD's Distribution Fee for *** under
         the Agreement for the period ***.

     (b) ***. If the *** for the New Release Programs and the Catalog Programs
         for the period ***, then UMVD's Distribution Fee for *** under the
         Agreement for the period ***.

     (c) ***. If the *** for the New Release Programs and the Catalog Programs
         for the period ***, then UMVD's Distribution Fee for *** under the
         Agreement for the period ***.

     ----
     *** Confidential information omitted pursuant to a request for confidential
         treatment filed separately with the Securities and Exchange Commission.


                                       2
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          (d) *** for a particular contract year of the Agreement under this
              Paragraph 2, shall be paid from the gross revenues otherwise
              payable to Playboy for the New Release Programs and (to the extent
              UMVD has recouped its then-paid Advances, and therefore gross
              revenue overages for the Catalog Programs are then payable to
              Playboy) the Catalog Programs, for the *** under the Agreement for
              the New Release Programs and the Catalog Programs for a particular
              period ***, so that UMVD shall be entitled to retain such portion
              of such gross revenues otherwise payable to Playboy in discharge
              of and as payment for the applicable ***.  If such gross revenues
              payable to Playboy for the applicable month are insufficient to
              discharge fully the applicable *** in the Distribution Fee, then
              the balance of such *** shall be payable from the gross revenues
              otherwise payable to Playboy for the New Release Programs and (to
              the extent of such overages) the Catalog Programs for subsequent
              months until such balance is fully discharged and paid, and in
              this regard, UMVD shall be entitled to retain such portion of such
              gross revenues otherwise payable to Playboy until such *** is
              fully discharged and paid.

     3.   Catalog Program Advances. UMVD shall pay to Playboy by wire transfer
          to an account designated by Playboy the following non-returnable, but
          recoupable advances (collectively, the "Advances") against Playboy's
          share of gross revenues from the Catalog Programs ***, as follows:

          (a)  For ***, payable promptly following the execution of this Third
               Amendment by Playboy (the "*** Advance").

          (b)  For ***, not reduced by any unrecouped portion of the ***
               Advance, payable on or before *** (the "*** Advance").

     ***  Confidential information omitted pursuant to a request for
          confidential treatment filed separately with the Securities and
          Exchange Commission.


                                       3

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     (c)  For ***, not reduced by any unrecouped portion of the *** Advance or
          the *** Advance, payable on or before *** (the "*** Advance").

4.   Recoupment.
     -----------

     (a)  UMVD shall report to Playboy on a monthly basis all gross revenues
          from the Catalog Programs for the previous month of the Term, and pay
          to Playboy such gross revenues minus allowable deductions in
          accordance with subparagraph 6(b) of the First Amendment, but with the
          following replacement for subparagraph 6(b)(vii) of such First
          Amendment: "With respect to a particular contract year of the Term for
          the Catalog Programs, commencing June 16, 1998, UMVD may deduct from
          the gross revenues from the Catalog Programs payable to Playboy, the
          total amount of the Advances then paid to Playboy under Paragraph 3
          above that have not already been deducted from the gross revenues from
          the Catalog Programs payable to Playboy, such deductions to be applied
          towards recoupment of the Advances. If for any month of the Term for
          the Catalog Programs, the total gross revenues from the Catalog
          Programs exceed the allowable deductions, in accordance with
          subparagraph 6(b) of the First Amendment, as modified by this
          subparagraph 4(a), then UMVD shall pay to Playboy the amount of such
          excess (collectively, "Overages"). Overages may not be used to reduce
          the amount of any future Advances that have not been paid at the time
          the Overages are paid."

     (b)  No sums payable to Playboy in connection with the New Release Programs
          may be used to reduce the amount of gross revenues payable to Playboy
          in connection with the Catalog Programs, and no portion of any Advance
          may be used to reduce the amount of gross revenues payable to Playboy
          in connection with the New Release Programs or may be applied towards
          any payment by UMVD for Playboy's inventory. Furthermore, no
          unrecouped portion of any Advance may be used to reduce the ***
          Advance or the *** Advance.

5.   DVD Termination Date, Grace Period, *** and UMVD Purchase of Catalog 
     --------------------------------------------------------------------
     Program Inventory.
     ------------------

     (a)  DVD Termination Date. The DVD Termination Date under the Agreement
          shall now be the first to occur of (i) ***, or (ii) the date on which
          UMVD notifies Playboy (or Playboy notifies UMVD) in writing,
          accompanied by reasonably satisfactory written evidence, ***.  If the 
          DVD 

     ***  Confidential information omitted pursuant to a request for
          confidential treatment filed separately with the Securities and
          Exchange Commission.
                                                                               4

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         Termination Date is prior to ***, then as of the DVD Termination Date,
         the authorized formats under the Agreement shall include DVDs.

    (b)  Grace Period. If the DVD Termination Date is prior to *** then Playboy
         shall have the right to grant to Image the Grace Period following the
         DVD Termination Date, in accordance with subparagraph 4(b) of the
         Second Amendment.

    (c)  ***

    (d)  UMVD Purchase of Catalog Program Inventory. Commencing June 16, 1998,
         UMVD's obligation to purchase some or all of Playboy's then-existing
         inventory of finished videocassettes of a New Release Program that
         becomes a Catalog Program during the Term for Catalog Programs,
         pursuant to subparagraph 5(b) of the First Amendment, shall be modified
         such that UMVD's purchase price for each finished videocassette unit
         shall be *** attached to this Third Amendment as Exhibit A. Such
         purchase prices for UMVD shall be effective for *** are for (i) new
         Fuji, BASF, SKC or comparable duplication grade tape stock with fewer
         than 8 dropouts per minute and meeting all ITSC standards, (ii) face
         label printing and materials, affixing the face label, inserting the
         videocassette into a sleeve, shrink wrapping the packaged videocassette
         and packing the finished videocassettes in 50 unit cartons, (iii) the
         corresponding length of program to be duplicated, (iv)
-----
*** Confidential information omitted pursuant to a request for confidential 
    treatment filed separately with the Securities and Exchange Commission.
                                                                               5
<PAGE>
 
         a minimum duplication quantity of no greater than 1,000, and (v) a 7-
         day duplication turnaround time, and that such ***. All other
         provisions regarding UMVD's purchase of Catalog Program Inventory from
         Playboy shall be in accordance with subparagraph 5(b) of the First
         Amendment.

    (e)  Catalog Program Duplication. Commencing June 16, 1998, so long as
         Marina Beach is reasonably meeting UMVD's manufacturing and packaging
         requirements and there is no interruption in the flow of product, UMVD
         shall manufacture and package all copies of all Catalog Programs at
         Marina Beach, using videotape masters and other master materials stored
         at Marina Beach and furnished by Playboy, instead of Playboy's
         furnishing to UMVD any videotape masters or other master materials for
         Catalog Programs. *** If Marina Beach is not reasonably meeting UMVD's
         manufacturing or packaging requirements or there is an interruption in
         the flow of product on account of Marina Beach's acts or omissions,
         UMVD shall notify Playboy in writing of such fact, specifying the
         problem, and if Playboy is not able to resolve the problem to *** of
         UMVD's notice to Playboy, ***.

    (f)  Playboy's Inventory Repurchase Obligation. Playboy's repurchase
         obligation for videocassette copies and videocassette sleeves of the
         Catalog Programs manufactured by UMVD, in accordance with the fourth
         sentence of subparagraph 5(e) of the First Amendment, shall not be
         determined by such number of copies and sleeves that Playboy has

                                                                               
----------
*** Confidential information omitted pursuant to a request for confidential 
    treatment filed separately with the Securities and Exchange Commission.
 

                                                                               6
<PAGE>
 
          reasonably advised UMVD to manufacture, as provided in such fourth
          sentence of subparagraph 5(e) of the First Amendment, but rather, UMVD
          shall be entitled to manufacture, and Playboy shall be deemed to have
          approved, such number of copies and sleeves of each Catalog Program
          that allows UMVD to maintain up to a *** supply of such program, until
          the last *** of the Term for the Catalog Programs, based on the sales
          history for the particular Catalog Program during the preceding *** of
          the Term. During the last *** of the Term for the Catalog Programs,
          UMVD and Playboy shall mutually determine the number of videocassette
          copies and sleeves to manufacture for each Catalog Program, with the
          goal of minimizing the remaining inventory while still sufficiently
          servicing all accounts and sales. As of June 15, 1998, Playboy
          acknowledges that the number of videocassette copies of the Catalog
          Programs manufactured by UMVD is reasonable, and upon the termination
          of the Term for Catalog Programs, Playboy shall be obligated to
          purchase from UMVD such number of copies of the Catalog Programs
          manufactured by UMVD as of such date that remain in UMVD's inventory
          at termination.

6.   Formats.

     (a)  As of June 16, 1998, the only authorized formats under the Agreement
          for the New Release Programs and the Catalog Programs are as follows:

          (i)    One-half inch (1/2") VHS videocassettes.

          (ii)   If the DVD Termination Date is prior to ***, then as of the DVD
                 Termination Date, the authorized formats under the Agreement
                 for the New Release Programs and the Catalog Programs shall
                 include DVDs.

          (iii)  If prior to ***, UMVD notifies Playboy (or Playboy notifies
                 UMVD) in writing, accompanied by reasonably satisfactory
                 written evidence, that ***, then as of the date of such notice,
                 the authorized formats under the Agreement for the New Release
                 Programs and the Catalog Programs shall include ***. In such
                 event, Playboy and UMVD shall negotiate the Distribution Fee
                 applicable to ***, taking into account the nature of the
                 format.

     (b)  The following formats are expressly not authorized or included under
          the Agreement for any program at any time:

     ----
     *** Confidential information omitted pursuant to a request for confidential
         treatment filed separately with the Securities and Exchange Commission.


                                                                               7
<PAGE>
 
          (i)    Linear, non-interactive, digital video discs (other than DVDs
                 pursuant to subparagraph 6(a)(ii) above and *** pursuant to
                 subparagraph 6(a)(iii) above);

          (ii)   DVD-ROM;

          (iii)  CD-I;

          (iv)   CD-ROM (except and to the extent agreed to by Playboy and UMVD
                 on a case-by-case basis for individual New Release Programs
                 that shall not become Catalog Programs for the CD-ROM format
                 (unless otherwise agreed), as is the case with the CD-ROMs
                 entitled "Pamela Anderson Playmate Portfolio," "Jenny McCarthy
                 Playmate Portfolio," and "Playboy's Babes of Baywatch,"
                 respectively);

          (v)    SEGA-CD;

          (vi)   3DO;

          (vii)  8mm;

          (viii) S-VHS; and

          (ix)   All analog laser discs (including 12") and all interactive
                 formats that allow the consumer more interactivity than
                 selecting start/stop/fast forward/reverse/freeze frame/slow
                 motion and the like.

7.   Brand Manager for Playboy Programs.  Promptly after the execution of this
     Third Amendment by Playboy, UMVD will designate to Playboy in writing a
     UMVD employee of at least the Manager or Director level: (a) who will serve
     as the principal liaison between Playboy and UMVD for all aspects of the
     sales of the New Release Programs and the Catalog Programs; (b) who will
     dedicate *** of his time to the New Release Programs and the Catalog
     Programs; and (c) whose bonus or incentive compensation will be based ***
     on sales of the New Release Programs and the Catalog Programs (the "Brand
     Manager"). The Brand Manager will be reasonably available to Playboy for
     telephonic and in-person consultation. UMVD will notify Playboy in writing
     as soon as is practicable in the event UMVD designates a different UMVD
     employee as the Brand Manager.

8.   Quarterly Sales Meetings. UMVD shall organize, conduct and pay UMVD
     personnel costs for calendar quarterly sales meetings for the Playboy and
     applicable UMVD sales staffs. *** of the quarterly sales meetings per
     contract year shall include Los Angeles and non-Los Angeles-based personnel
     from UMVD's sales staff, and these meetings may be in conjunction with
     UMVD's regional or national sales meetings. The other *** quarterly sales
     meetings

     ----
     *** Confidential information omitted pursuant to a request for confidential
         treatment filed separately with the Securities and Exchange Commission.


                                                                               8
<PAGE>
 
     per contract year may be limited to Los Angeles-based personnel from UMVD's
     sales staff. Within the parameters of this Paragraph 8, *** shall
     reasonably determine the participants in the quarterly sales meetings from
     UMVD's sales staff. Playboy shall have the opportunity to present
     information, including about upcoming releases or promotions, and conduct
     training at the meetings. The meetings also shall include an account-by-
     account review of actual sales and potential sales opportunities and sales
     execution and cooperation by and between UMVD and Playboy personnel.

9.   Direct Response Marketing.  Playboy shall continue itself to handle all
     direct response marketing, which shall include all internet sales of New
     Release Programs, Catalog Programs and all other Playboy programs.  Except
     for specific accounts that Playboy has authorized UMVD in writing to
     service, UMVD will not participate in any direct response marketing of the
     New Release Programs, the Catalog Programs or any other Playboy program.

10.  VSDA Conventions.  For each VSDA Convention (or other principal home video
     convention in the U.S. that might replace the VSDA convention as the
     principal U.S. home video convention) that occurs during the Term, UMVD
     shall pay to Playboy at least two (2) months prior to the beginning date of
     the convention (except with respect to the 1998 convention, for which UMVD
     shall pay Playboy promptly after Playboy's execution of this Third
     Amendment), ***. Playboy shall have no obligation to account to UMVD for
     any of such payments.

11.  No Precondition to Effectiveness.  Paragraph 12 of the First Amendment
     shall not be applicable to the Agreement, and therefore there are no
     preconditions to the effectiveness of this Third Amendment other than the
     execution of it by Playboy and UMVD.

Except as set forth in this Third Amendment, the Agreement is not otherwise
modified in any respect, and the Agreement, as extended and supplemented by this
Third Amendment, is ratified and confirmed.

If this Third Amendment accurately reflects the agreement between UMVD and
Playboy, please so indicate by signing this Third Amendment in the appropriate
space provided below.

----
*** Confidential information omitted pursuant to a request for confidential
    treatment filed separately with the Securities and Exchange Commission.


                                                                               9
<PAGE>
 
     Very truly yours,


     
     PLAYBOY ENTERTAINMENT GROUP, INC.


     By:  /s/ William Asher
          -------------------------
      
          VP New Business
          -------------------------
             Name and Title



     ACCEPTED AND AGREED TO:



     UNIVERSAL MUSIC & VIDEO DISTRIBUTION, INC.


     By:  /s/ Larry Kenswil
          -------------------------

          Exec VP
          -------------------------
             Name and Title

<PAGE>
 
                                   Exhibit A

                           MARINA BEACH VIDEO, INC.





June 18, 1998


re:  *** for PlayboY Catalog ***


Att.: John Reese


Universal Video and Music Distribution
60 Universal City Plaza
Universal City, CA 91608


Dear John,


Below is *** you requested.


                                      ***

<TABLE>
<CAPTION>
               LENGTH        ***
              <S>           <C>
               T-5                
               T-10               
               T-15               
               T-20               
               T-25               
               T-30               
               T-35               
               T-40               
               T-45               
               T-50               
               T-55               
               T-60               
               T-65               
               T-70               
               T-75               
               T-80               
               T-85               
               T-90               
               T-95               
               T-100              
               T-105              
               T-110              
               T-115              
</TABLE>

Please contact me if you have any questions.


Regards,

/s/ Jerry Borreson

Jerry Borreson
Operations Officer


11811 W. OLYMPIC BLVD., SUITE 111, W. LOS ANGELES, CA 90064 
(310) 478-3839 . FAX (310) 477-8494