Something ugly I observed in conversation (7)
I believe the answer is:
eyesore
'something ugly' is the definition.
(term for an ugly building)
'i observed in conversation' is the wordplay.
'i' becomes 'eye' (I've seen this in other clues).
'observed' becomes 'saw' (I've seen this before).
'in conversation' indicates a 'sounds like' (homophone) clue.
'saw' is a homophone of 'sore'.
'eye'+'sore'='EYESORE'
(Other definitions for eyesore that I've seen before include "Blot on the landscape" , "Ugly prospect" , "Ugly and offensive sight" , "Unpleasant sight" , "Ugly item" .)