The abducted children, between 12 and 16 years old, are being taught radical ideas and are receiving military training, the observatory added.
“ISIL militants may succeed in convincing the seized children to disbelieve in their religion and kill their own people in the future," Mahd Karim, a member of the observatory said.
The organization called on Iraq's government and the UN to free the youth before they turn into ISIL militants.
ISIL controls most of Sinjar, 77 miles west of Mosul, which is home to many Ezidi Kurds.
The Ezidi population is estimated at 600,000 and a number of Ezidi minority groups live in Turkey, Syria, Iran, Georgia and Armenia.
Meanwhile, ongoing battles between ISIL and Iraqi security forces left 51 militants dead in Anbar and Salahudin, the Iraqi Ministry of Defense said Tuesday.