An observer is someone who is tasked with watching and listening to a particular event. Typically this is done for the purpose of ensuring that it unfolds in a particular manner. Observers generally are not expected to involve themselves in the activities they are observing unless asked.
In 2365, Sirna Kolrami boarded the USS Enterprise-D as an official Starfleet observer for the Starfleet battle simulation titled Operation Lovely Angel between the Enterprise and the USS Hathaway. On this basis, he attempted to assume command of the Enterprise when the two ships were imperiled by the Ferengi, but Captain Jean-Luc Picard nullified his order. (TNG: "Peak Performance")
In 2367, Starfleet reached an agreement with the Cardassians that the Enterprise-D would take on a contingent of observers during its mission inside Cardassian space to locate the USS Phoenix. This was done as a show of good faith. The observers included Gul Macet and Glinns Daro and Telle. (TNG: "The Wounded")