Previous research suggests that students' prior knowledge can interfere with how they observe and remember lecture demonstrations. We measured students' prior knowledge in introductory mechanics and electricity and magnetism at two large universities. Students were then asked to predict the outcome of lecture demonstrations. We compare students' predictions before having seen the demonstration to what they report having seen both right after the demonstration and several weeks later. We report four main findings. First, roughly one out of every five observations of a demonstration is inconsistent with the actual outcome. Second, students who understand the underlying concepts before observing the demonstration are more likely to observe it and remember it correctly. Third, students are roughly 20% (23%) more likely to observe a demonstration correctly if they predict the outcome first, regardless of whether the prediction is correct or not. Last, conceptual learning is contingent on the student making a correct observation. This study represents an initial step towards understanding the disconnect reported between demonstrations and student learning.