It's funnier in context: they were on their way to Betazed for a Betazed wedding ceremony, ie. nudity. This was after Worf got into a hissy about being naked at the cermony and Picard making it clear that EVERYONE would be respecting the custom. It's after this that Picard said his line. Of course, what Picard said to Worf when he first heard the Klingon's resistance:
Picard: A big, striking fellow like yourself? What's there to fear? (His tone makes it clear he's teasing Worf)
B4: Why do you have a shiny head?
B4: Why does the tall man have a furry face?
Data: B-4, do you know where you are?
B4: I am in a room. With lights.
Data impersonating B-4 manages to convince the audience that he's B-4.