Lucy says that Anne of Cleve's was beautiful, just not so in the King's eyes. His pride was hurt when she did not recognize him at first, so he seemed to be unable to perform in bed, and blamed her.
Anne of Cleves was not as beautiful as portrayed by the actress in this episode. In fact Anne had no beauty which is why Henry turned her away. However according to history Henry made Anne an adopted sister and allowed her to live at court.