Sound envelope temporal fluctuations are important for effective processing of biologically relevant acoustic information including speech, animal vocalizations, sound-source location, and pitch. Amplitude modulation (AM) of sound envelopes can be encoded in quiet with high fidelity by many auditory neurons including those of the auditory nerve (AN) and cochlear nucleus. From both neurophysiological and clinical perspectives, it is critical to understand the effects of background masking noise on the processing of AM. To further this goal, single-unit recordings were made from AN fibers in anesthetized chinchillas. Units were classified according to spontaneous firing rate (SR) and threshold. Best frequency (BF) pure-tone bursts and AM (10-500 Hz) tone bursts were employed as stimuli at several sound levels, both in quiet and in the presence of a continuous wideband noise. It was found that (1) in quiet, low SR AN fibers show the strongest AM coding, followed in order by medium SR and high SR fibers, respectively. (2) AN units of all three classes generally preserve their AM coding even in the presence of loud (0 or +6 dB S/N) background noise and at high sound levels (over 75 dB SPL). (3) This preservation is usually achieved by lowering the average firing rate proportionately to decreases in the synchronous (fundamental frequency) response. (4) For a few AN fibers, the AM coding increases or is reduced in the presence of the background noise. These findings suggest that AN preservation of AM coding in the presence of a continuous masking noise results from shifts in the operating ranges and firing rates of AN fibers resulting from cochlear nonlinearities and adaptive mechanisms.