This episode, as well as most of the other season 4 episodes, have been feeling a bit forced and lacking and I have a theory as to why.
The first 3 seasons relied heavily on real events from the real Adam Goldberg's life, thus giving those episodes a natural flow and genuine feel.
I think season 4 is were they are running out of real events to draw inspiration from and they are starting to move into almost completely "what-if" scenarios. In other words, seasons 1 - 3 are episodes based strongly on reality with a proper dose of exaggeration to a great result. Season 4 is based very loosely on reality and loaded with exaggeration.
Here's my breakdown on "Ho-ly K.I.T.T." to reinforce my theory.
The episode forces out a lot of exposition right away. We are told about K.I.T.T. in the starting narration, then quickly introduced to the parade which will just so happen to have K.I.T.T. in it and Adam quickly expresses his excitement for it. Then the show tries to pull off one of it's signature arguments, where the characters use odd/made-up synonyms for words (like face-hole instead of mouth). Obviously, this routine can be funny, but when it's happening in the first two minutes of the show it feels forced.
Then Marvin Goldberg (Murray' brother) soon after the initial setup and shortly after that Marvin and Murray coincidentally bond over Knight Rider. Without any opposition the two decide to go to the parade featuring K.I.T.T. Then Adam finds out and is mad. With little effort Adam turns the two against each other (Adam even mentions the lack of effort in the show). Then, Adam easily convinces Marvin to go to the Mall to get a picture with K.I.T.T. They end up driving K.I.T.T. back home and it gets dented by the turkey that flew out of the deep fryer. The show ends with another heartfelt apology scene.
To me the story did not flow, like it did in past seasons. This episode felt more like a series of events strung together in order to squeeze out a story, instead of a solid story where the events arise naturally from the story being told. The K.I.T.T. episode feels like the writers didn't know what to do so they went down a checklist.
I've noticed a few season 4 episodes being really dialogue heavy. Sometimes there's no pauses between the characters lines. From personal experience (a few film classes where I had to write and film short movies) this happens when you are trying to explain to much plot through the characters or when you are trying to squeeze to long a story into too short a time line. Basically, this happens when your back is against a wall and you can't figure out a good way to rework the plot.
I still watch and like the show, but I can't help but notice these issues in season 4. Plots seemed forced, like writers struggling for ideas and then saying "Hey, Knight Rider was popular, let's do a show on that." "Yeah, what else could we add?" "How about some zany arguments, or Beverly being overprotective, and then an apology at then?" "Yeah, Let's just throw some stuff out there and see what sticks."