We all knew that when the tech was implanted in Peter's head that bad things were going to happen. It's inevitable. You can't put future tech in your head from a bald future seeing species of human and expect it not to screw with you.
We saw the good parts in the episode before when he want all Neo on the Observers, saw how they see and then even teleported. In this episode, we saw the consequences of it. The usually emotional Peter seemed far to detached from the beginning.
He was using his new found powers t predict the future paths of a group of the Observers. Meanwhile, Walter is beginning to feel like his original self important God complex self and it's scaring him. As the episode goes on, Peter begins to bleed from his ear and has a severe headache. After that, it was all down hill.
The emotions drained and he began to talk like them. In the final scenes with Olivia, Peter is talking in the exact cadence of the Observers. It's obvious that he's turning into one and now that Olivia knows can she keep her Peter from being overwhelmed.
In the last scene, Peter pulls out a clump of his hair and we know that the transformation is picking up pace. He's still on our side and bent on destroying Windmark, but who knows how long that will last. If the preview from the next episode is any example, it's going to be one hell of a fight.