Going back through the second season, I'm constantly surprised by how many good episodes there are - I had only remembered "Measure of a Man" and "Q Who", but "Time Squared" and "Contagion" are also very good.
Like "Contagion", this episode is a thriller -- but it also has a certain psychological depth that the earlier episode lacked. In this one, the level of dread gradually rises as the Enterprise slowly drifts toward its rendezvouz with disaster. There are all sorts of small vignettes - Geordi and Data figuring out how to repower the shuttle, Pulaski and Troi in sick bay, Picard yelling at his double from the future, O'Brien expressing dumbfounded shock at the disappearance of the double - that together aggregate into one excellent whole. And the musical score is outstanding, adding marvelously to the escalating tension. Patrick Stewart gives another brilliant performance, showcasing a side of Picard that we rarely see - a Picard beset by doubts and who at some points loses his composure.
The rest of the ensemble does a great job as well. Maybe my memory is fuzzy, but this is probably the best performance up until this point by both Marina Sirtis and Diana Muldaur - their tense argument in sick bay is an integral part of the episode.
TNG did a bunch of time travel episodes, and in general the execution was riddled with inconsistencies and contradictions. But as long as you don't worry too much about internal logic, these episodes - "Time Squared", "Yesterday's Enterprise", "Cause and Effect" (which in many ways echoes "Time Squared" and arguably tops the original), "Tapestry", "All Good Things..." - are among the best of the series.