Season 2 - Episode 2 "Night of Desirable Objects"

When seven people simply disappear in a small rural town, Fringe division is there to investigate. However, Olivia is still recovering from her crash, and is discovering new side effects of her trip to another dimension. Because of this, she is not at her best and almost shoots Peter in the head because of poor judgment. Broyles has taken notice of this and has warned the team to keep their eyes on her. As for the disappearances, the investigation leads the team to the home of a retired scientist, Hughes, who seems to know more than he is telling us. Unfortunately he kills himself before he can reveal anything about the case, but not before agent Jessup learns of his wife and kid dying twenty years ago in childbirth. After exhuming the bodies they discover that the kid has buried down and out of his casket, and is now what is attacking these people. This child has become this way because Hughes altered him in the womb to allow him to survive the doomed pregnancy due to a condition his wife had. After a violent showdown, the team emerges victorious, and Olivia seeks help from an unlikely source.

And where is the Observer. Well I have to say that he is really being a bad sport about where to find him in this episode, it took me about three tries to find him, and then I only found him by accident. In the wide shot of Hughes house just before Jessup finds the bible, you can see the very small outline of our friend looking at the house about the middle  of the shot and then far to the right. I have added a red box around the Observer because, as I have already said, he a pain to find.