Does this simple database design work even if it's cyclic?
So, just to clarify:

You want 1 Report to have Many Observations. The Observations then become either a Case or NoCase. Now, each case/nocase is linked by the ObservationID and the ReportID (or the Observation itself belongs to a ReportID), right? 

It wouldn't be a circle: Report->Observations->Case/NoCase (I can see the Case and NoCase entities as one specialization).