Season 2 - Episode 9 "Snakehead"

When a boat loaded with illegal Chinese immigrants sinks, fringe is called in to investigate the real cause of their deaths. A worm that has been known for its potential healing properties by the Chinese has been unknowingly implanted in these people and been allowed to grow. However, once the worms outgrow their hosts, the people are killed and the worms are then harvested for their lymph glands, which can cure any immune disease. With a second shipment of these people coming in, the team has to work fast before they are found by the triad gang who is behind this violation against nature. Meanwhile, Walter attempts to break free from his son but ends up accidentally getting Astrid hurt. Feeling terrible, Walter implants himself with a tracking device and gives Peter the transponder, so that he will not be lost.

And where is the Observer? Well he is very hard to find this time so don't feel to bad if you missed him. He is on screen for about 2 seconds when the man in the Chinese herb shop calls to have Walter and Astrid followed. He walks right past the camera so he is very blurry, but is still recognizable. You can see him below in the middle of the customary red box.