The hidden terminal problem is unique to wireless networks and as of now, there is very limited understanding about its effects on network performance. Results are presented from a simulation study of the IEEE 802.11 MAC protocol when operating in the presence of hidden terminals. We also propose a framework for modeling hidden terminals which can handle complex scenarios of both mobility and static obstructions. Our simulations indicate that hidden terminals can have a very detrimental effect on the performance of the IEEE 802.11 MAC protocol. Although throughput is acceptable when about 10 percent of station pairs are hidden, packet delay can increase by an order of magnitude. Performance of the protocol drops sharply when the number of hidden pairs exceeds 10 percent.