In this paper we present results for the existence of classicalsolutions of a hydrodynamical system modeling the flow of nematicliquid crystals. The system consists of a coupled system ofNavier-Stokes equations and various kinematic transport equationsfor the molecular orientations. A formal physical derivation of theinduced elastic stress using least action principle reflects thespecial coupling between the transport and the induced stress terms.The derivation and the analysis of the system falls into a generalenergetic variational framework for complex fluids with elasticeffects due to the presence of nontrivial microstructures.