Well, I have a couple of issues with this episode. Really, they packed way too much into one episode. This could easily have been a two-part episode, and if they had done that they could have taken much more advantage of the story possibilities.
First issue, if KARR is a military vehicle, why does he become a Mustang? It would have made much, much more sense for KARR to have a more rugged, military look when he was in "car" mode.
Second, we know that KITT didn't have any protection, as his regeneration systems were down, along with his weapons, etc., etc. So, why was it so easy for him to smash through KARR without getting destroyed?
Third issue, at the end, when KITT's systems are back online, there's just a blue glow, and PRESTO, KITT is in perfect condition again. The quality of this special effect is pathetic. Compared to the detail that they give whenever KITT goes into attack mode, or any of his other tranformations, this change looked like a B-movie special effect.
Finally, and I think that this is really the biggest issue of all and is possibly the source of most of the other issues, there was just too much story to tell in a single episode. The episode ended up feeling incredibly rushed, especially toward the end. They could have easily spun the rescue of KITT out a little bit more, and ended with KARR chasing KITT, KITT not fully functional, and Michael facing the decision about what to do. In part two, they could have opened with Michael choosing to face KARR, had a confrontation in which KITT is almost destroyed but he and Michael manage to escape, get KITT fixed up, though probably not to 100%, only to have KARR track them down and have a final show down. Then, at the end they could have had a little bit better staged version of the final scene from this episode. All in all, it would have made for a much better telling of the story. The conflict between KITT and KARR would have been much more credible.