When Olivia begins to believe that she is killing people through her dreams, the team begins to worry about her. But when she begins to know specific details about the murders, Broyles orders a full investigation. Through this investigation they discover that Olivia's buddy in the Cortexiphan drug trials, Nick Lane, is sending her these messages through the dreams. He can't control his power and demands that Olivia kills him, before he causes any more harm to those around him. Olivia can't kill Nick, so he is put in a coma so that his power can't harm anyone until he can be cured. Later Walter reviews tapes of his past experiments and sees Olivia in one tape, with him and William Bell trying to calm her.
And where is the Observer in this episode? Well I would classify this as medium difficulty so you should have been able to see him if you were looking. And if you weren't, well, we will talk about this later. He is walking behind the team as they approach the building where Nick is thinking of jumping to his death. Again he is in the picture below in a red box. I spoon feed you guys way to much.
My personal least favorite episode until present date. Just in case you wanted to know.