Shred cheese with a coarse grater (cheese should be purchased as a block and shredded by hand: pre-shredded cheese contains anti-caking agents that prevent the queso from coming together properly).
In a saucepan, melt better over med-low heat and then whisk in flour, stirring constantly for about 2 minutes. Add milk while whisking constantly, and bring to a simmer. Stir in chilis and seasonings and turn heat down to very low. Add cheese 1/4 at a time, stirring constantly until smooth. Remove from heat and serve.