When placing red-stone on top of an observer and then on a lower block beside the observer, the red-stone trail will connect. However, when the red-stone is powered the connection doesn't work and the lower section isn't powered. This happens only with the observer block and the orientation of the block doesn't make any difference. Red-stone signals can travel up the block, but I think that is just because the block itself it considered powered. Other blocks such as the dispenser and dropper do not have this problem, however glass and glow-stone also have this problem.

See picture below, it's much easier to understand the problem.