Spoiler Level: High
Another wonderful character piece, as Geordi invites Data to take his interest in Sherlock Holmes to the next level and play at being Holmes on the holodeck. At Pulaski's prodding, Geordi attempts to create an adversary capable of beating Holmes to challenge Data, but ends up asking for an adversary capable of beating Data himself.
And so we get the first sentient hologram, as Moriarty begins to become self-aware. It's a subject that will be studied more in depth on Voyager in years to come, but the questions are first raised here when Moriarty asks Picard, what makes Data alive and not him?
The only real drawbacks are that, for there to be drama, the episode has to recycle elements of "The Big Goodbye." The holodeck is a wonderful concept, but for it to make for good drama, the emergency failsafes have to fail so that the characters are in real risk. And it won't end here; it's also continues through Deep Space Nine, and probably Voyager as well.
Pulaski's skepticism of Data's abilities to intuit and deduce are a little harsh, although she's not as bad towards him here as she was in "Where Silence Has Lease." It probably would have come across better if she had been merely skeptical, as opposed to being so certain she was right.
Lastly, this episode is generally believed to have gotten the Star Trek crew in a bit of hot water. I had always heard that Paramount thought at the time that Sherlock Holmes had fallen in to public domain, but it had turned out he hadn't. Well, according to io9, that's just a myth. Paramount knew all along the copyright on Sherlock Holmes was still good, and had already worked things out with Arthur Conan Doyle's estate ahead of time. Go figure. Presumably, Holmes is finally in the public domain by the 24th Century and his estate didn't need to get paid for the holodeck program itself.