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We consider the impacts of channel fading on the quality of service (QoS) performance of the IEEE 802.11 system. Traditional 2-D Markov chain models, while suitable for throughput analysis, are unable to capture the QoS performance due to the lack of a proper queueing model. We present a 3-D Markov chain queueing model that incorporates channel fading effects and solve the Markov chain efficiently with our Collapsed Transition onto Basis approach. In doing so, we are able to investigate important QoS measures, packet delay and loss, as well as throughput, for a 802.11 system under practical channel fading conditions. The analytical results are validated by extensive simulations. Our 3-D model offers new insights in channel fading effects on system capacity and QoS performance. We demonstrate that our 3-D model can also be used to provides guidelines for traffic control.