When it comes to shows, I put them into 3 categories: Shows that start off great; Shows that become great later on; or Shows that are doomed to mediocrity. I consider "Red Dwarf" to be in the second category.
I don't think the first series is bad, just not great, with the exception of "Future Echoes" and maybe "Waiting for God". However, this episode, easily the best since "Future Echoes", was a pivotal moment in the series, not only in quality but direction too.
One reason is because of the introduction of Kryten himself. Although he would eventually be played by a different actor, his character would continue on and make the series great.
But another reason is the introduction of "Blue Midget". Now, this may not seem like much, but this crutial ship allowed the show to expand beyond the confines of the Red Dwarf itself.
There are some brilliant moments in this episode, too many to list, but I do have my favourites. My all time favourite from this episode would definitely have to be this:
LISTER: Drop dead, Rimmer!
RIMMER: Already have done...
The timing of those 3 simple lines is absolutely perfect.
Despite it's quality, it's not the best episode in the series, but a very close equal second.