Peter O'Donnell, 29, is a white man who lives with his wife and two children in a $150,000 renovated house in a rundown neighborhood on Capitol Hill. Young, educated, liberal, he came here to live the dream of social and economic integration.

After six years on the hill, the O'Donnells are ready to move out entirely or to a more plush neighborhood on the Hill, nearer the Capitol.

"Frankly, we've had our experiment with a diverse neighborhood," said O'Donnell. "We're looking for a somewhat less diverse neighborhood. We're just enchanted with Cleveland Park . . ."

Capitol Hill is one of the most dramatically changing parts of the city. Some blacks say whites are invading. Some other blacks appear to be glad to sell at inflated prices and move to the suburbs. Some liberal whites say the wrong kind of whites are moving in-investors, people with attache cases.

Poor people sit in dingy apartments listening to the hammers of renovators tapping out their doom.

Lincoln Square at 11th and East Capitol streets lies at the heart of the change. White and black joggers jog there in the evening. White and black families stroll there.

In a back alley just south of the park two small white girls play catch against a backdrop of Cadillacs and Mercedes parked in elegant rows in restored garages.

Renovation has been most intense west of the square toward the Capitol. The posh Eastern Market area with its boutiques and prosperous real estates offices lies just to the southwest and a few blocks to the north is the rundown neighborhood where the O'Donnells live.

Dogs are are a topic of conversation in the area. Many whites bring German shepherds and dobermans when they move in. The dogs sometimes run unleashed in the park.

Lincoln Square gets its name from the emancipation statue of Lincoln standing over crouching, chained black man. Blacks tend to call the square Bethune Park for the statue there of Mary McLeod Bethune, the great black educator whose words are on the statue's base: "I leave you love, I leave you hope . . . I leave you racial dignity."

Now, some people complain, the dogs are defecating on the statues.

"You want my true personal feelings, I think I'm being invaded (by whites)," said Clevonn Yeager, who lives on 15th Street just above East Capitol. "I myself don't like it. This is my neighborhood . . . Where once upon a time whites were afraid, they're not anymore. They cavort up and down the streets as if to say, We're back'.

". . . You don't blame the individual (white), you blame the system. I think a lot of black people still see whites as threats. But a lot of blacks are more content with what they have now, not like the militancy of the '60s. (Politically), there's a lot of apathy. They don't want to help the brothers and sisters who are still down and out."

In a nice row house around the corner from Yeager live William Parker, a school janitor and his wife. "You think about what's going to happen to your property," said Mrs.Parker.". . . Where are you going to move to? You could move out to Maryland, but then they're having their problems out there. I guess what you do is you live and you hope. . .

"It seems nobody is looking out for you. I was listening to the doctor on the TV saying what to do to live longer. Sometimes I wonder why. Why live longer?"

"We want Cleveland Park (or a more plush Hill area) because wewant a more stable neighborhood socio-economically," said O'Donnell. "It's more comfortable. In a neighborhood where you're a minority both economically and racially, it can become very lonely. . . I look around at the other houses and I feel uncomfortable and my neighbors feel uncomfortable for me. . .They walk by and they look at us and we smile at them and we get blank stares. . . "

The O'Donnells have done well financially by living on the Hill. When they first moved there in 1972 they rented a house, but in a few months moved to an apartment in order to save the down payment for a house of their own.

In April 1975 they bought a small,restored two-bedroom house on Waters Street SE for $50,000. They sold it a year and a half later for $75,000 and moved to their present restored house on C Street NE, paying $98,000 for it.O'Donnell says this house is worth at least $150,000 now. The spacious, modernistic house contains a rental unit that brings in $350 a month.

But money isn't everything. "I've come to recognize that there are major differences in whole sets of values in my background and values that are different from many of the neighbors," said O'Donnell. "My neighbors, they just throw the trash every place and their kids break bottles as a hobby on Saturday night. I can't imagine ever doing that, no matter how poor I got. . . "

Jeffrey Burney, 20, answered the door with a green bedspread wrapped around himself and a kitchen knife in his hand. The small apartment he shares with his mother in a rundown building near the O'Donnell house does not have a peep-hole in the door. Burney, a large man who speaks slowly, apologized for having the knife.

A few years ago the Burneys had to move out of a larger apartment nearby when the owner decided to renovate to sell.

"It seems that poor people now just don't have any choice but to get something smaller," said Burney. He said he has seen many changes in the area, and as he spoke the tapping of hammers could be heard through the open window from the sites of nearby renovations. "I guess it's progress. Life, I guess. I see more people moving out and people that's got jobs moving in. I ain't going to say it's a black-white thing. People that can afford it are moving in.

"I see changes on the street. There used to be a whole crowd of black people hanging around. Now it seems they're fading away. In four, five years most all my friends end up in jail, some got killed, some went to the service. They couldn't find no jobs."

Burney finds jobs when he can. His mother receives public assistance, he said.

"From my point of view, things ain't looking good for us," he said. "I guess it was meant for us to struggle hard, you know. And I feel sorry for the people who's in badder shape than we is. . . I guess we'll make it, though. My mother, she always tells me to look up. But sometimes I do still think negative. . . I'm at my friend's house and all of a sudden I'll fall quiet. My friends say, 'Jeff, how come you silent? You gotta stop worrying so much.' This is a hard life, you know. Once (people) are on their feet, most people, they forget where they came from."

Larry Feldman, a developer who is renovating town houses on the Hill, said his elegant town houses are selling this year for $200,000, twice as much as in 1973 and $50,000 more than in 1977.

He used to set prices on his houses by calling a number of trusted real estate agents and averaging their estimates. Now he does the same thing but adds a third to a half on top of their average. The house sell.

Feldman said he has heard that houses he sold for $200,000 earlier this year have been put back on the market at prices ranging from $230,000 to $250,000 and have sold at those prices.

Feldman came here in 1963 as a free-lance campaign manager for liberal Democratic congressional candidates. He calls himself a political liberal, "a very traditional kind of Jewish left-wing activist . . . [now] I'm trying to make a lot of money. I reached a point in my life where I decided I want to make a lot of money."

Jeffrey Tucker, a young real estate agent who recently moved to the Hill from Georgetown, said, "A lot of the people I deal with want an investment. They want a good house in a developing area. They wouldn't want to live there if it remained what it was-or what it is . . ."

A young white woman, who has lived on the hill 10 years and who asked not to be identified said she thinks the "wrong kind of whites" are moving there now.

"There are a time when you lived there for social reasons-the urban experiment, the old Kennedy stuff . . . But now they're moving in for investment, for convenience. I'm just running into a lot of people I don't agree with."

"Maryland continues to get people from the District, they're going to have the same conditions as the District," said Daisy Powell, who lives just north of H Street NE and who is chairman of an area neighborhood commission.

"Some of the places people moved to aren't near as nice as here . . . Most of the blacks who moved out, they wish they were back. They have commuting problems, then the parking problem . . . and the crime is spreading out there . . . Maryland is getting the spillover, and when it gets bad, then what are you going to do, where you going to go?"

Veola M. Jackson is the educator who in five years has helped turn the Edmonds-Peabody public elementary school a few blocks east of the Capitol from a rundown school into a thriving educational institution.

There were only six white students when she arrived. Then the percentage of whites increased to 16. 25, 35 and even larger percentages of the total.

"People said I was a dupe for white people," she said. "At first I felt apprehensive. Then I said, "I can't worry about it. I want to do a good job . . . If it's white or black, my job is to see the kids get the best."

Richard N. Wolf is president of the Capitol Hill Restoration Society, the powerful, largely white organization that seeks to preserve "an architectural heritage and the amenities of urban life" on the hill, according to a society pamphlet.

"Many black home owners in the city appreciate the fact that their neighborhoods are getting better," said Wolf. "They don't want to live with some of the car-strippers and drug dealers. In many ways, they're inarticulate about it. They don't want to be called 'Toms.'"

Wolf said the society "is expressing middle-class values-protection and maintenance of property, cleaning up the streets, getting trees planted. But these values that are [rejected] by some people are actually something that most people want for themselves and their families."

While children from middle class and poorer backgrounds mix well at the elementary school level, Wolf said, this does not work in high school.

"In high school the middle-class parental ambitions come in," he said. "Among middle-class parents, there is much less romanticism about socializing of kids in an integrated environment and [there is] a shifting toward seeing kids develop sound skills and sound achievement." So black and white parents send their middle-class children to private secondary schools.

Katherine Connley has lived for 29 years in a modest brick row house south of Benning Road. She has become used to the telephone calls of eager real estate dealers asking if she wants to sell.

"My husband and I definitely going to stay right here," she said. "I can walk to Sears, Hechinger's. I can walk to most anything I want."

Her son Stanley said the dealers offer "a whole lot of money" when they call. "It's what looks like a lot of money to old people, but you go out to Maryland or Virginia and it's just chump change, so they end up going into these apartment complexes that are small and not even convenient."

The search for good schools is a key reason middle-class blacks move out of the city, said Evelyn R. Beam, president of the Kingman Park Civic Association. She said her two daughters and their families moved to Clinton and Temple Hills for this reason.

"They were teachers in D.C. and they felt there were better opportunities for the children in Prince George's." she said. "It's a pity for the District because one girl is a speech therapist and the other is a teacher."

Beam lives in an immaculately kept house in a pleasant, solidly middle-class black neighborhood near the Anacostia River. Although whites have not yet begun moving in there, Beam said it would not bother her if they did because they would be middle class like herself.

"If my white friends who are moving in [to the changing areas west of her house] can stand to live for a while beside these poor people, well, more power to 'em because I don't know if I could do it," she said. "The teenagers get very, very mean and there are burglaries . . . In those areas I'm more uncomfortable that [a white] because a lot of the crime is black on black. They would lash out at me quicker than [a white] if I'm middle class. They feel, 'Oh, you think you're better than I am.'"

John Gravel,y 38, is a government management specialist who lives with his wife in a renovated town house on 12th Street SE. The gravelys drive a sporty car, dress well, and could live in a posh suburb if they wanted. They don't want to, however. "I enjoy this where you get people on the streets and noise on the streets," said Gravely. "I don't mind having white neighbors."

He hopes that the poor will not be pushed out of the area entirely, however. "We can't allow ourselves to become so exuberant over the development that we lose sight of the poor . . . That is one of the tragedies. The poverty has not gone. It's still there." CAPTION: Pictures 1 and 2, Signs often go up as soon as renovation is completed on many of Capitol Hill's older homes. Photos by Tom Allen-The Washington Post; Picture 3, Expensive automobiles, campers and completely refurbished town houses line the streets around Lincoln Park in the southeast area of Capitol Hill. Photos by Tom Allen-The Washington Post; Picture 4, Jeffrey and Mabel Burney: "Poor people now don't have any choice."; Picture 5, Eastern Market at Seventh Street and North Carolina Avenue SE, with its fresh produce, fruit stands and meat counters, is a Capitol Hill landmark.