I have just installed SLK 1.4 and configured it on our SharePoint 2007 server.
Enthusiastically, I created group with the roles of Learner, Teacher and Observer and sadded myself to all.
I then got the "To use the observor role session state must be enabled for the web application" error.
I thrashed about a bit, rebooting etc to no avail.
I then downloaded the source code and searched for observor (it's good to have spelling mistakes as they are easier to find).
There was the raise error routine and it only applied to observers.
I am not even sure what observers do, so I guess I don't need it.
I fixed the problem by removing the observer role from all groups.
Then everything worked fine.