Rx – can/should I replace .NET events with Observables?

For #2, the most straightforward way is via a Subject:

Subject<int> _Progress;
IObservable<int> Progress {
    get { return _Progress; }
}

private void setProgress(int new_value) {
    _Progress.OnNext(new_value);
}

private void wereDoneWithWorking() {
    _Progress.OnCompleted();
}

private void somethingBadHappened(Exception ex) {
    _Progress.OnError(ex);
}

With this, now your “Progress” can not only notify when the progress has changed, but when the operation has completed, and whether it was successful. Keep in mind though, that once an IObservable has completed either via OnCompleted or OnError, it’s “dead” – you can’t post anything further to it.