Multistage compressor is the most important constituent of gas turbines used in land, naval and aeronautical applications. Overall performance of such machinery depends mainly on the axial compressor performance. Due to the relative motion between rotor and stator blades, the flow field in this machinery is highly unsteady. Furthermore several technological effects like tip clearances, complexity of the blade shapes, variation of axial distance between stator and rotor, seal leakages and cooling holes among others complicate the machine. Therefore the study of a complicated, strongly threedimensional flow field inside a compressor is considered to be one of the most difficult tasks to be performed by a CFD expert. The present work is the extensive numerical study of the effect of: (1) tip clearance of rotor blades and (2) the axial gap between rotor and stator on the overall performance of a multistage axial compressor. A commercial software package is used for this study. Reynolds-averaged Navier-Stokes equations are solved using Spalart-Allmaras model. A number of steady-state viscous flow simulations were run for both the tip clearance effect and different axial gaps between stator and rotor. All simulations were performed for the first stage, i.e. Stator-Rotor-Stator. Simulations were carried out with coarse, medium and fine meshes to find an optimum, meshindependent solution. It has been found that larger tip clearance has a detrimental effect on the stage pressure ratio and efficiency of a multistage axial compressor. Similarly there exists a certain distance ratio between the stator1-rotor and rotor-stator2, where stage performance is optimum. Overall performance characteristics obtained through simulation for both the tip clearance and axial gap variation were also compared with the experimental studies and found to be in good agreement.