A microscopic polymer liquid-state theory has been developed for the structure, thermodynamics and mechanical properties of strained liquid crystalline elastomers. The theory captures the experimentally observed phenomenon of spontaneous distortion and establishes a direct correlation between it and the nematic order parameter. Strain induced softening of the elastic modulus is predicted to emerge due to coupling of the induced orientational order and anisotropic interchain excluded volume interactions. Comparison of our results with limited experiments shows good qualitative and sometimes quantitative agreement. The theory predicts that deformation in the liquid crystalline state results in an increase of the amplitude of density fluctuations (compressibility) which becomes more pronounced as chain degree of polymerization and/or segmental density are decreased.