Great episode. The key is to just flip your perspective. Like "Spock's Brain," look at it as a comedy, played hilariously straight. That's the only explanation for a story where a woman gets turned on reading her grandmother's erotic journal, then gets the hots for her granny's lover. And the broad stereotyping. And Picard, seemingly totally serious, saying, "funny, you don't look Scottish" to a forehead alien.
The kicker for me was the fog on the bridge, especially Jonathan Frakes' deadpan reading of the line, "It just rolled in." He was the director on this one, so he knew better than anyone what he was going for. At that point, you know that they're not taking this seriously.
As a comedy, brilliant stuff, and a really fun episode to watch.