Bo Peep does not appear in Toy Story 3. It is implied that sometime between the events of Toy Story 2 and Toy Story 3, Bo was sold in a yard sale with her sheep. The only toy to mention her was Rex when the remaining toys remember their friends who are no longer with them. When Rex says her name, it is apparent that Woody is still saddened and hurt over her loss due to their romantic relationship. However, she appears only as a background toy in archive footage at the beginning of the film during a home video montage of Andy as a child.
Bo Peep's shrinking role in the series after the first film is explained in The Art of Toy Story 3. Bo Peep was among the main cast of the first film as a voice of female reason, and was not Andy's toy, but a porcelain lamp. Due to being unable to find a believable spot in the story, Bo Peep only appears in the beginning and end of Toy Story 2. Bo Peep was ultimately written out of the story due to the fact Molly and Andy wouldn't want her anymore, and emblematic of the losses the toys have had over time. She also was written out due to the belief that Andy wouldn't have anything to say about her when he gives the other toys to Bonnie at the third film's end. Although she is not in the third movie, she appears in the Toy Story 3 videogame in toy box mode.
It had also been hard to find a place for Bo Peep in Toy Story 2, which is why she appears only at the beginning and end of the film. The filmmakers felt audiences wouldn't accept a porcelain lamp going off into the city and having an adventure. They even joked that she might roll herself in bubble wrap and FedEx herself to Al's apartment.