An augmented reality optical system comprises a waveguide structure that includes a waveguide layer supported by a substrate. An input grating and an output grating reside within the waveguide layer and are laterally spaced apart. Input light from a display is made incident upon the input grating. The input light is coupled into the waveguide layer and travels therein as multiple guided modes to the output grating. The input and output gratings provide phase matching so that the guided modes are coupled out of the waveguide layer by the output grating continuously along the output grating to form output light. Meantime, light from a scene is transmitted perpendicularly through the output grating so that the output light and the light from the scene are combined by the eye of a user to form an augmented reality image.