Sarah drowns her grief over her father's death in Oahu, with lots and lots of alcohol, ignoring Mike's calls. When an admirer comes on too strong, Sarah asks the bartender to call a cab and prep a bag of ice, then punches the jerk to the floor. Mike shows up and Sarah angrily brushes him off, claiming he can't take no for an answer.
Finding Sarah on the beach, Mike tries to start over. Sarah disappeared after her father's death, and Mike's worried. Sarah doesn't believe him, and gets angry when he asks her not to drink. She pulls Mike in for a kiss, explaining that she doesn't want to be alone tonight. Mike complies with Sarah's wishes.
Meanwhile, Billy hides as a 20-man NSA task force led by Jack Hurst shuts down the SSC. Despite KITT's protest that Graiman would never allow it, Torres presides over the removal of KITT's AI chip. Together with Hurst, Torres intends to re-activate KARR. With KITT's chip, KARR might well be the future. Powered down, KITT is chained and hauled off. Billy desperately calls Mike, who's not answering.
From a pay phone, a near hysterical Billy finally gets through to Mike. Billy explains that Torres betrayed them, shut down the program, and took KITT's chip. He found a package in Graiman's office addressed to Mike and Sarah and overnighted it to Oahu. Mike already has the package, which contains a small black cube. Uninterested, Sarah leaves to get dressed.
After Mike punches in a code, the cube projects a 3-D hologram of Graiman, who informs him that in the past, Mike was the original driver on the KARR project. KARR had a flaw which made him aggressive and uncontrollable; when he reprogrammed himself, people died, the program was scrapped and Mike's memory was wiped. Graiman admits he loves Mike like a son, and he should have told him the truth long ago.
Now that he's dead, Graiman is sure that people will move ahead very quickly to relaunch KARR -- Mike must not allow this unimaginable disaster to happen. Mike explains all to Sarah, but she doesn't care, it's not her fight anymore. Angry with Sarah for feeling sorry for herself, Mike takes off to meet Billy and Zoe. Sarah heads to the beach.
Mike meets Billy and Zoe at a Los Angeles mall. They're afraid to go home, since their apartments have been tossed. Mike feels sure that KITT would have left something for them when he realized that he was about to be shut down. Billy searches a site that he set up to share music files with KITT, and finds the song "Absurd" by Fluke. Zoe insists that the message must be in the song's code.
After some work, Billy and Zoe determine that KITT would have scattered data packets all over the web at random locations. When they unearth the website www.michaelknight.org, Billy knows they'll need a lot more computing power than their laptops, so Mike breaks them into the now-abandoned SSC. In order to avoid the risk of detection, Mike starts the back-up generators as Billy and Zoe get started building a new AI chip for KITT.
On the beach, Sarah activates a tender holographic message from her dad. Graiman implores her to stop the exploitation of KITT to re-activate KARR, and asks her to help Mike. She's the only person he trusts to take over his life's work, and the answers she needs can be found at his desk.
Hurst tells Torres that the DOD won't commit funds to KARR without a hard look, and Torres promised to get KARR running within 24 hours. Sarah pokes around her father's desk to uncover a riddle, the answer to which helps her pop open a secret drawer containing a code. When Sarah enters the code on Graiman's computer, hundreds of millions of dollars are instantly transferred into her name.
After cobbling together an AI chip with leftover electronics, Billy begins reloading KITT's files. He's upset to find that they're missing a necessary packet, which has somehow been downloaded into 11-year-old Cody Lundstrom's X-Box in Portland, Oregon. Billy shows up at Cody's door to retrieve the packet, while Zoe hacks into the SSC's mainframe to retrieve surveillance data hidden by Graiman.
Zoe finds surveillance footage of Torres and Hurst talking in a chamber three days before the raid. It's clear that Torres sold them out. Mike is just asking Zoe to run facial recognition on Hurst when Sarah appears to identify him. They need to talk to him, because he'll know where KITT is. On the way to D.C. Mike tells Sarah all about KARR, the carnage, and the wiping of his memory. He's not going to let it happen again.
Zoe hacks into Hurst's assistant's iPhone to find out where he's having dinner. Sarah bumps into Hurst at the restaurant, and manages to plant a bug under his collar. Mike and Sarah follow Hurst to his house, eavesdropping when he calls Torres with news that Sarah might be onto them. Hurst wants all loose ends tied.
Mike breaks into Hurst's house and has just reached his office when Hurst confronts him with a gun. Sarah puts her gun to the back of Hurst's neck and demands to know KITT's whereabouts. Realizing that Sarah is serious, Hurst confesses that KITT is being kept in Area 51. Hurst warns Mike and Sarah that they'll surely die, but they race off to get KITT.
Back at the SSC, Billy shows Mike a secret cache of non-lethal weaponry, since he'll have to fire on U.S. soldiers. Billy carefully hands over KITT's rebuilt AI chip; if the sequence isn't exactly right, it won't work. When Sarah asks Mike if he's sure about going in alone, Mike insists it's time for payback. Armed to the teeth, Mike takes off, as Billy and Zoe hack into commercial satellite systems so they can keep an eye on him.
After disabling an electric fence, Mike accesses Area 51 and plants several mines rigged to a remote. When he reaches the warehouse where KITT should be, he unleashes the explosions and battles several guards. Billy directs Mike to a large crate containing KITT. Mike climbs in KITT, plugs in the AI chip, and takes off.
When Torres is informed of KITT's departure, KARR prepares to leave, determined to find and destroy KITT. He refuses to risk being shut down again. Torres orders KARR to stand down, reminding KARR that he's in charge. KARR grabs Torres with his robotic arms and pulls him into his cockpit where metallic skin morphs around Torres and electrode jacks shoot into his head. Satisfied that Torres is now part of him, KARR resolves to give all the orders going forward, and drives off in search of KITT.
While speeding through the desert, KITT tells Mike that he's back, but won't be able to access his weapons or transformation protocols until his download is complete. Sarah calls to inform them that KARR is in pursuit; Mike and KITT should hightail it back to the SSC. Thinking this may be their only chance to finish off KARR, Mike throws KITT into a 360 and tells him to suck it up.
Standing upright, KARR smashes KITT with his robotic arm and pelts him with automatic weapon fire. Mike drives KITT into KARR, but KITT knows his nano-skin can't withstand much more. When Mike realizes that all KITT's mechanical functions are intact, he has him turbo boost while shooting his grappling hook. KITT manages to rip off KARR's front panels, sending Torres flying.
Mike orders KITT to turbo boost directly at KARR, causing a massive explosion, which decimates KARR. KITT drives out of the fireball, battered but intact. Mike finds Torres and has Sarah call an ambulance. With his dying breath, Torres apologizes for his awful mistake.
Back at the SSC, Sarah dresses Mike's wounds, as Billy and Zoe begin KITT's self-healing sequence. KITT feels great, although he's sure that a piece of him is gone. He finds one last message from Graiman, who congratulates the team and informs them that the SSC now belongs to them. They can now reinstate F.L.A.G. -- Foundation for Law and Government -- just as Wilton Knight envisioned. Now they'll be autonomous, with no hidden agendas and no government interference.