Season 2 - Episode 10 "Grey Matters"

When three different schizophrenic patients of a mysterious Dr. Paris, are each cured instantaneously during a break in at each of their own separate medical facilities, the team is called in to investigate. After reviewing the tapes at each scene they discover that one of the men, Thomas Jerome Newton, used to be a cryogenically frozen head that was stolen by the shapeshifters. Now with a name for their enemy, Olivia is hellbent on killing this man. But while searching for Newton, the team discovers that the patients each had a small portion of brain tissue implanted in their skulls. Each of these pieces were removed by Newton during the break-ins, but without a host, they are slowly dying. After coming up with very little leads on what Newton plans, we discover that the brain tissue belongs to Walter, and each piece contains a memory. Newton kidnaps Walter and temporarily reconnects the tissue, trying to discover how to open a door to the other universe. When Olivia and Peter arrive, they are able to save Walter, but they are not able to stop Newton from escaping. The tissue dies, and with it, Walter's memories of what has happened. The episode ends with a flashback to when Walter's brain tissue was removed. It is revealed that William Bell was Dr. Paris and that he had hidden the tissue in the three patients.

And where is the Observer? Well he is very hard to spot in this episode, so don't feel bad if you missed him. He is across the street from the washroom where they think Newton is keeping Walter. He is in the red box as always, so there should be no trouble for you to find him.