The physical mechanism of liquid crystal (LC) alignment in ferroelectric LC (FLC) droplets dispersed in a photocurable polymer matrix was studied. The orientational ordering of both FLC molecules and the polymer matrix was induced by a rubbed polyimide alignment layer. There existed an optimum FLC droplet size for the production of uniformly oriented molecules and smectic layers for maximum electro-optic modulation. The alignment quality was critically dependent on the droplet size, shape, the helical pitch, and the phase transition sequence of the FLCs. The molecular structure formed inside the FLC droplets resulted from a delicate balance between the elastic energy stored in a restricted geometry and surface interactions at the FLC-polymer interface.