From the IMDb:It's interesting how Oscar Goldman's relationship with his secretary Peggy Callahan had changed between seasons two and three. What we saw of Callahan in season two consisted of her referring to Oscar as "Mr. Goldman". By season three, she refers to him as "Oscar".
I think it's O'Bvious. At some point between "Once A Thief" (season ender for Season Two) and "The Bionic Dog Part One" (season premiere for Season Three), Oscar and Peggy had an affair.