In an augmented reality system, Mutual occlusion and intensity matching of real and virtual environment enhance the user’s feeling that virtual objects truly exist in the real world. Aiming at the attribute of conventional optical see-through HMD which cannot present mutual occlusion and intensity matching correctly, we propose a novel display design with mutual occlusion and intensity matching capabilities. An 8-bit gray level XGA LCD, by which mutual occlusion and intensity matching be accomplished is used as the addressable filter in our design. Furthermore, with our optical system, a viewer can simultaneously observe both outside scene and a pattern on the LCD panel in focus. Experimental results show that our novel design can integrate more seamlessly a virtual object in a real scene.