Dollars are flowing freely through the Washington economy in 1985, but area companies are finding profits harder to come by in an increasingly competitive business climate dominated by mergers and acquisitions.

The leading 100 publicly owned, nonfinancial corporations in the Washington region rang up new records for revenue last year, but total profits fell. A total of $32.6 billion in revenue poured forth from their collective horns-of-plenty, an increase of 18.9 percent over the $27.4 billion tallied in 1983. Profits totaled $1.33 billion in 1984, down 9.5 percent from the $1.47 billion recorded a year ago. However, assets of Washington-area firms went up 18 percent, from $30 billion to $35 billion.

Since last year's look at Washington's Top 100, several significant threads have become more prominent in the fabric of Washington business. Among them:

* Falling interest rates. Lower rates have eased the pressure on banks and thrifts, widening the spread between the money they lend and the money they borrow. The result: Greater profits for the institutions and easier loans for builders and others who play Washington's premier game -- real estate development.

* Higher Defense Department spending. Many of the region's high-tech and professional services companies are luxuriating in what some defense contractors say is a "very healthy" rise in new business. While there seem to be somewhat fewer contracts, they say, the contracts have larger dollar values and are more comprehensive, leading to more "teaming" by companies that work together on contracts.

While the firms tally their larger backlogs and higher earnings, their executives say life is changing in other ways. Competition is tougher, there are fewer "sole source" contracts, there is more competitive bidding and contract proposals are undergoing more severe price scrutiny by the military.

* Mergers and acquisitions. Acquisition fever overtook dozens of companies in the Washington region. In a year that saw the sale of a board game called "Acquire," a number of area companies adopted a philosophy of growth-by-acquisition and were either completing acquisitions or looking for companies to buy.

Overall, it is the slide in interest rates that has done the most to change the climate for Washington business during the past year, declared Thomas J. Owen, president of Perpetual American Bank.

"The business climate of the Washington area can best be characterized as upbeat," said Owen, who noted strong activity in office building and office occupancy, in land-tract purchases and housing development. A year ago, he said, people were uneasy about the direction of interest rates. Today, "People are less concerned about the rapid escalation of interest rates," and thus willing to initiate new projects.

While profits were generally harder to come by last year, several firms saw hefty earnings increases. Among them were Entre' Computer Centers, Inc. (up 667 percent), Software AG of North America Inc. (up 369.2 percent), The Rouse Co. (up 277.4 percent), Primark Corp. (up 58.8 percent), USAir Group Inc. (up 50.8 percent), and Washington Gas Light Co. (up 33.4 percent).

In the last year, two new megabuck companies moved their headquarters to the Washington area and vaulted into the ranks of the Top 10 -- an exclusive club that now requires almost $1 billion in revenue for admission.

One newcomer is Primark Corp., a diversified energy and financial services holding company that moved its headquarters from Detroit to McLean to separate itself from its chief subsidiary, Michigan Consolidated Gas, and to get closer to government officials who regulate its businesses. Primark, with $2 billion in revenue, took over fifth place among the region's Top 10 companies.

Another new player on the nation's capital business stage is the giant Gannett Co. Inc., a $1.9 billion communications company that publishes 85 daily newspapers, including the full-color USA Today. Having gone national with its newspaper, Gannett decided to leave its long-time digs in Rochester, N.Y., for a high-rise home on the Potomac in Rosslyn. The media company also found a home in sixth place among the Top 10.

Martin Marietta, a growing aerospace and high-tech powerhouse, hung on to first place on the Top 100 list on the strength of its $4 billion in revenue, but tallied a 1984 loss of $191 million, the price of selling off most of its aluminum division as part of a corporate restructuring.

The Chesapeake & Potomac Telephone Cos., which held second place last year, slipped to the third spot, swapping places with Marriott Corp., whose booming growth and $3.5 billion in revenue pushed Marriott to second on the list -- and not far behind Martin Marietta. The Marriott empire, which originated in a downtown hot dog stand, has doubled its sales and profits since 1980.

The 1985 edition of the Top 100 is missing some familiar corporate names that have have vanished from the stock tables because of the heavy traffic in mergers and acquisitions.

Woodward & Lothrop Inc. became a privately held company in September after shareholders approved the $227 million sale of the 16-store chain to Michigan real estate developer A. Alfred Taubman.

In May, Peoples Drug Stores was acquired by the Canadian food and tobacco conglomerate Imasco Ltd. for $320 million. Sheldon Fantle, the former president and chief executive, continues to run the drug chain -- in his new role as chairman -- from the Alexandria headquarters.

TU International Inc., on the other hand, has dropped from the list because of financial woes. Its failure to file a financial statement for its fiscal year ended June 1984 prompted the National Association of Securities Dealers to delist the Falls Church computer servicing and leasing company. Despite company comments that it is eager to be relisted, no updated documents have been filed with the SEC. New management has promised to clear up the firm's finances. One of the company's chief subsidiaries, Dickenson Lines Inc., filed for protection from creditors under Chapter 11 of federal bankruptcy laws.

Gone, too, from the Top 100 ranks of public companies is Family Entertainment Centers of Rockville, whose chain of Chuck E. Cheese restaurants developed a case of financial indigestion and forced the company also to seek protection from its creditors under Chapter 11.

LogEtronics Inc. of Springfield surrendered its status as a public company when it was purchased in April 1984 by DBA Systems Inc. of Melbourne, Fla., after LogEtronics' financial fortunes turned downward. The acquisition matched two companies active in the development and manufacture of photographic and computer-imaging systems.

Taking its last bow on the Top 100 stage is Compucare, a Reston-based company that designs computer systems for hospitals. Compucare's stock dropped sharply when its sales fell, and the firm has been acquired by Baxter Travenol, one of the nation's leading medical and hospital suppliers.

Joining the Top 100 list for the first time are two companies. Hitech Engineering Co. of McLean, which is 99th on the list, does work in electronic security. Netword Inc. of Riverdale, Md., in 100th place, is involved in electronic mail.

On the merger and acquisition front, some of the M & As, as they've come to be called, were truly impressive. CSX Corp. of Richmond, already one of the largest U.S. corporations with revenue of $8 billion, merged its 27,000 miles of rail line and trucking facilities with the country's largest barge company, American Commercial Lines, to create the nation's biggest hauling system.

On a somewhat more modest level, Computer Network Corp. of the District, with annual revenue of $14.2 million, bought Ford Laboratories Divisions of New Jersey, a manufacturer and marketer of vitamins and nutritional supplements, for $11 million. With Comnet's computer-processing business declining, the firm has been looking for noncomputer companies it can buy "to leverage the company's assets and hopefully make it more profitable," said Comnet Chairman John Spohler.

For some regional firms, acquisitions are a major happening; for others, they are an everyday occurrence. Penril Corp. of Rockville, whose strategy is growth through acquisition, has made 14 acquisitions in the last 12 years, including one just last month of Alltest Inc., a maker of computerized test equipment for diagnosing car problems.

But the king of acquisitions is Morton M. Lapides, president of Allegheny Beverage Corp., which recently moved its headquarters from Baltimore to Cheverly, Md. Lapides has collected companies like kids used to collect bottle caps, while expanding his Pepsi bottling company into a conglomerate of food service and vending firms, coin-operated laundries and building maintenance companies. In four years, Allegheny made 33 acquisitions. Lapides has now agreed to sell the Pepsi side of the business for $160 million to help pay for his $225 million acquisition of Servomation Corp., a food service and vending company.

The region's banks -- big and small -- were all right on the money when it came to playing the M & A game. United Virginia Bankshares of Richmond, the second-largest bank holding company in Virginia with assets of almost $6 billion, bought a significant chunk of NS&T Bankshares in the District for $119 million. Dominion Bankshares of Roanoke, the third-largest in Virginia, bought three small banks last year and will purchase three more this year.

Dollars were flying in Maryland, too, where First Maryland Bancorp., second-largest in the state, acquired two small banks while moving closer to giving Allied Irish Banks of Dublin more than 50 percent of its own shares by 1987.

In other deals, USLICO Corp. in the District bought United Olympic Life Insurance; Universal Leaf Tobacco acquired Lawyers Title Insurance Corp.; Smithfield Foods of Arlington bought Patrick Cudahy Inc. of Wisconsin; Radiation Systems acquired Mark Antenna Products of Des Plaines, Ill.; Preston Corp. of Preston, Md., took on Reeves Transportation of Georgia; Planning Research Corp. of McLean bought Kentron International Inc. of Dallas, and PHH Group of Hunt Valley, Md., acquired Transamerica Relocation Service of San Francisco.