As the demand for high-speed and wirelesstransmission of information is rapidly increasing, spectrally efficient digiral radio modulation and demodulation scheme is preferred. In this paper, we have studied the signal generation, demodulation and performance evaluation of spectrally efficient QAM signals in a wireless channel environment. We propose differential modulation and demodulation scheme for QAM in rayleigh fading channel. First, formulas for theerror probability of proposed QAM scheme are derived over QWGN channel. Second, we evaluate the performance of the proposed QAM scheme in rayleigh fading environment through computer simulation, and confirm that it shows much better performance compared to that of conventional QAM scheme.