We present a new analytic study of the equilibrium and stability properties of close binary systems containing polytropic components. Our method is based on the use of ellipsoidal trial functions in an energy variational principle. We consider both synchronized and nonsynchronized systems, constructing the compressible generalizations of the classical Darwin and Darwin-Riemann configurations. Our method can be applied to a wide variety of binary models where the stellar masses, radii, spins, entropies, and polytropic indices are all allowed to vary over wide ranges and independently for each component. We find that both secular and dynamical instabilities can develop before a Roche limit or contact is reached along a sequence of models with decreasing binary separation. High incompressibility always makes a given binary system more susceptible to these instabilities, but the dependence on the mass ratio is more complicated. As simple applications, we construct models of double degenerate systems and of low-mass main-sequence-star binaries. We also discuss the orbital evolution of close binary systems under the combined influence of fluid viscosity and secular angular momentum losses from processes like gravitational radiation. We show that the existence of global fluid instabilities can have a profound effect on the terminal evolution of coalescing binaries. The validity of our analytic solutions is examined by means of detailed comparisons with the results of recent numerical fluid calculations in three dimensions.