Take note of everything that you are witnessing. This is actually harder than it sounds, because we see thousands of things every time we open our eyes. Because of this onslaught of sensory information, we have learned to "trim down" or filter the information that we actually register. The best way to improve you observation skills is to broaden the scope of what you consciously register and notice.
Read people. In social situations, read into the people you interact with. Do not simply go off your impression on a person's mood or receptiveness. Instead, delve into why you have that impression. Ask yourself what their facial expressions mean to them -- and what they think those expressions mean to you. Make note of gestures and expressions of affirmation and remember what it was that brought them about. This practice will leave a lasting impression of that person and the time you experienced together.
Size people up -- not in an aggressive manner, but literally: Try to estimate their height, weight, age, hair color (natural or dyed) and possible ethnicity. After each person, apply the previous person's information to the next. For example, "This person is taller than the last with lighter hair." As you practice, this information will begin to register involuntarily and will thus increase your observation skills.
Make lists of patterns. As you go through your daily routine, make note of those things that are repetitive. There will be certain colors that you see more during the day. Remember certain sounds and what caused them. Break these patterns into categories so that when you observe them you can easily attach them to previous experiences. This association of experiences will build your awareness for future observations and make it easier to absorb more of what is around you.