We have measured the dielectric response of PDLC films containing liquid crystal droplets of E7 in a polymethylmethacrylate (PMMA) matrix as a function of frequency (0-10KHz) and temperature (25°C-11O°C). The liquid crystal composition of the films was varied from 0% to 60%. A principal objective of this study was to understand the dissipation mechanisms in these systems in an effort to control and reduce them. In the light of the experimental results, we discuss the primary dissipation mechanisms, including both DC and AC losses. The major contribution to the losses in these materials comes from the liquid crystal conductivity. Quantitative interpretation of the results can be clouded by a number of factors including incomplete phase separation of the liquid crystal and polymer, percolation effects and a frequency-dependent conductivity due to charge-carrier depletion in the liquid crystal droplets. Using simple two-phase composite formuli to model the dielectric behavior, the contributions of the real and imaginary parts of the dielectric constant to the field inside a droplet are discussed. The model agrees quantitatively with capacitance experiments, indicating that for frequencies below 100 Hz the field inside of a droplet is strongly modified by charge built up at the droplet/polymer interface.