This is what I was wondering about: how does a particle ‘know’ it is being observed? Something has to interact with it physically, and once affected its physical properties change. Is that right?

I’m a total layman here but so fascinated with all this. Trying to get a better understanding.

Particles don't know anything. The way we see anything, even with our own eyes, is to analyze reflected photons. You can't see something without hitting it with something first and analyzing what bounces back. Obviously, if you're bouncing photons off something, you're going to affect its state. Usually this effect is negligible, but in the case of trying to watch individual particles, well, it's no longer negligible, it affects the experiment.

The problem is people tend to assume observation is passive, they think seeing something does't affect it; this simply isn't true at all. Eyes only work because the sun is continually spraying and bouncing photons off everything. Sight isn't passive at all, you need a photon source spraying photons everywhere, like a flash light.

What's strange about the doulbe slit experiment isn't that watching forces the particles to act like particles, that's the expected behavior all the time, the same as a single slit. What's strange is that when you don't watch it, you get the interference pattern indicating a wave that isn't acting like a particle. That's not at all expected and indicates the particle is going through both slits and interfering with itself. I'm a total layman as well, but that's my take on it.

That is very wrong. A particle doesn't 'know' it is being observed. However, when it interacts with other particles, the new state of both particles depends on the old states of both particles.

For a better explanation than I could possibly write here, see http://lesswrong.com/lw/r5/the_quantum_physics_sequence/.

I get that particles don’t know anything, that’s why I put it in quotes. But then again, how do we know they don’t know anything? Could elementary particles possess a form of consciousness?

For any reasonable definition of consciousness, no.