Patrick Stewart and guest star Terry O'Quinn deliver excellent supporting performances. And even though it was a minor role, I also took note of Michael Mack, who was also very good and appropriately smarmy as the Romulan commander. But this is a Riker episode, and Jonathan Frakes delivers probably his finest performance as a man struggling to resolve the conflict between his loyalty to Picard and his duty to obey Starfleet's orders.
My favorite moment in this episode is the reaction on Riker's face as he realizes that Picard is threatening to remove him as First Officer. Bravo Jonathan Frakes!
I also enjoyed the mystery aspect of the story, as the audience (as well as Picard) doesn't know what's so important about the Pegasus and what it represents.
And let's not forget Levar Burton's direction, which provided some fresh camera angles, and nicely framed the actors so as to take full advantage of the previously mentioned performances. He also created a bit of a darker look, which complemented the darker storyline.
As for the treaty, yes, the Federation did give up an important tactical advantage. But not an insurmountable one. Starfleet has a detection grid all along the Federation borders, and a similar setup was used to thwart the Romulans during the Klingon civil war. We don't know what the Federation got in return for giving up cloaking technology, but it must have been significant. And as stated in the episode, that treaty has kept the peace for 60 years.