The Observatory is a tower in Okanos overlooking The Scar and the Thirteen Towers. It was built by the Elyrian army to watch over the Thirteen Towers, but it was abandoned long ago. Since no one uses it anymore, Mavda thinks it is a good place for Elena and Aeron to hide from the army, since they won't look there.
The timer which shows how much time there is before Elena transforms into a beast does not count down while you are in the Observatory. It is basically your base for the whole game. It is the only place you can talk to anyone, Buy, Sell, Create, Repair, Upgrade, or save (excluding Quick Save and Saving after certain points) in the entire game. From here you can choose to go to any tower that you've unlocked. You return here upon clearing each tower and defeating the Masters.
Pressing Z while in the Observatory will show you where Elena is if you wish to talk to her, give her a gift, feed her beast flesh or ask her to translate a document for you. She will change place depending on the time. She will be in the kitchen cooking food at 7:00, 12:00 and 18:00. She will be in the courtyard or on the roof around evening/early night time. She will be in the main part or outside during the day, upstairs after 20:00 and in bed between 0:00 and 6:00. By sleeping in the bed you can change the time to whatever you want, as well as restoring your health.
The Observatory is made up of several areas: