Dynamics of phase separation and morphology development in mixtures of a low molar mass liquid crystal (LC) and a polymer have been investigated theoretically in comparison with experimental results. In the theoretical model, the combined free-energy densities of Flory-Huggins theory for isotropic mixing and Maier-Saupe theory for nematic ordering have been incorporated into the time-dependent Ginzburg-Landau equation (type C). The temporal evolution of the structure factor and the emergence of phase-separated liquid crystal domains have been simulated on the basis of an explicit central difference method based on a square lattice (128 x 128) with a periodic boundary condition. Of particular interest is the observed plateau (or inflection) region in the growth dynamic curve, which may be attributed to the breakdown of the interconnected domains caused by the nematic ordering. This unique behavior has been verified experimentally in terms of the growth of structure factor following several temperature quenches into a nematic+liquid region of the experimental phase diagram of an E7/poly(methyl methacrylate) mixture. Further, the emergence of LC domains in the metastable and unstable nematic-liquid spinodal regions has been investigated theoretically and compared with the reported experimental results. (C) 1999 American Institute of Physics. [S0021-9606(99)52012-6].