An observation system for masking a privacy zone and method thereof are provided. The observation system has a camera part that photographs a certain observation area. An operation part receives a user-set command for selecting a privacy zone among the observation area, where the privacy zone requires no observation. A control part outputs a control signal for setting a mask area that masks the privacy zone according to the user-set command. An area set part generates a plurality of vertexes forming the mask area according to the control signal. An image signal process part uses a mosaic scheme to masks the privacy zone photographed by the camera part according to the mask area formed by the plurality of vertexes set by the area set part. An output part displays the mask area masked by the image signal process part. Therefore, the privacy zone photographed from the camera part is not displayed on a screen.