Co-Operative Intelligent transportation systems (C-ITS) incorporate distributed control and coordination to ensure better and safer transportation networks, reduced carbon emissions, and improved traffic flows. In particular, ITS may benefit greatly from the synergy of technologies for traffic simulation, real-time control, and communication networks. In this paper, we develop an augmented reality demo environment for ITS by combining traffic micro-simulation with a physical scaled intersection model containing toy vehicles controlled by embedded controllers. We use the framework to develop an application illustrating the use of vehicle-to-vehicle (V2V) communications between vehicles to facilitate safe driving. Vehicles maintain appropriate distance and use variable acceleration and smart lane-changing to ensure safety. We simulated V2V communications between autonomous vehicles by modifying the on-board electronics on the vehicles and by using the XBee wireless standard for communication.