Flow small-angle light scattering and linear conservative dichroism are used to follow, in situ and time resolved, the flow-induced changes of the microstructure in viscous emulsions such as immiscible polymer blends. A dilute system consisting of poly(butadiene) droplets dispersed in a poly(isobutene) matrix has been used as a model system. Contrary to earlier rheo-optical work on such materials, the structure has been probed in the plane formed by the flow and the velocity gradient directions. In this manner, shape anisotropy as well as the orientation angle can be monitored continuously for droplet sizes where microscopic observation becomes difficult or even impossible. During steady-state shear flow the size-dependent orientation of the droplets could be detected. It is shown that the various morphological stages caused by a sudden increase in shear rate can be identified and quantified: droplet deformation and rotation, fibril formation, and development of interfacial instabilities leading to breakup and reorientation of the resulting small droplets. These latter stages result in very characteristic light-scattering patterns. Values for anisotropy and orientation are derived from dichroism and light-scattering data and compared with theoretical results for the case of affine droplet deformation.