A thermodynamic perturbation theory in the high temperature expansion is presented for a system of hard spherocylinders with a permanent longitudinal dipole positioned at the center of the molecule. The free energy of the reference hard spherocylinder is described using an expression derived by Lee [J. Chem. Phys. 80, 7036 (1988)]. The dipole contribution to the free energy is evaluated using a generalization to the perturbation theory for dipolar hard spheres proposed by Larsen, Rasaiah, and Stell [Mol. Phys. 33, 987 (1977)]. The effect of increasing dipole strength on the isotropic-nematic phase transition of a fluid of spherocylinders of aspect ratio, L/D = 5, is studied using a generalization to the well known Onsager theory [Ann. N. Y. Acad. Sci. 51, 627 (1949)]. The single particle orientational distribution function is approximated with a gaussian trial function while an ad hoc approximation is used for the pair and triplet correlation functions of the hard spherocylinder reference system. While these approximations seem quite severe they are not expected to affect the general features of the phase diagram. Increasing the dipole moment is found to destabilize the nematic phase with respect to the isotropic phase, shifting the phase transition to higher densities and pressures. This is in general agreement with the most recent simulation studies of the system. All other theories of this system predict a stabilization of nematic phase. It is suggested that the reason for the failure of these theories lies in the two body character of their approach to the orientational order in the liquid crystal phase. To the knowledge of the authors this is the first theory for the isotropic-nematic phase transition of dipolar hard-spherocylinders which explicitly includes three-body interactions in the orientationally ordered phase. (C) 1997 American Institute of Physics.