By designing an appropriate state observer, we have constructed two subsystems which alternately synchronize the chaotic drive system. When the parameter of the transmitter is modulated using the binary digital signal, the two systems can alternately be synchronized with the chaotic system. In the receiver, information is demodulated by analyzing synchronization error. An observer-based parameter modulation and demodulation Henon system was chosen to be a typical example. Numerical simulation is carried out to illustrate the effectiveness and efficiency of the proposed method.