This paper aims to design an infrastructure for distribution of dynamic multimedia objects in a Networked Virtual Environment (NVE) based on a distributed proxy architecture. Dynamic objects (such as audio, video and images) are generated by the users on-the-fly, are often short lived and must be disseminated to others in their area of interest while the application is running. It is expected that a significant portion of network traffic for future NVE applications will be due to these objects. However, because of the upstream bandwidth constraints of clients, a peer-to-peer model for dissemination of these objects is unlikely to be scalable. We develop a distributed server infrastructure for this purpose and produce a mathematical model for optimal establishment of proxy servers, assignment of clients to proxies, and replication pattern of objects among the proxies. The formulation is non-linear (quadratic)in both the objective function and one set of constraints. We provide a technique to linearize the model, which provides the opportunity to solve reasonable size problems for benchmarking. In addition, we provide a fast and efficient heuristic that can be used to obtain near-optimal solutions to the problem in real-time. Finally the paper concludes with computational results showing the performance of the linearization procedure and the heuristic algorithm on randomly generated Internet topologies. It is shown that our heuristic algorithm produces solutions that are within 20% of the optimal.