One NE40 WAN-FastEthernet board have 16 ports. Actually WAN-FastEthernet board have one function that it is change Layer 3 ports to work as layer 2 ports, so each port should be able to configure portswitch and change the port from layer 3 to layer 2 port. But this case is only one port can't use command portswitch any other ports can use, if you use (?) question mark to ask router in interface port model, it only shows there isn't that command and only have two commands ping and port-self-protect.
Delete the observe function, then you can use portswitch and change port working type.
If we use command display interface ethernet ehernet port number, then we can see there are many packets on the port's output and it is increasing, but no input packets on the port. So according to this phenomenon, it shows us that we configured this port to observe port.
If you want to change one port of WAN-FastEthernet board working as layer 2 port, you have to guarantee there aren't any configuration on this port.