Brad- The knife edge to which you refer is what is called a spur. Some bits have a single spur and some have a "double" or "twin" spur. As you said, these are to cleanly cut the fibers on the circumference before the center material is drilled out. Two spurs will generally produce a cleaner hole. Some of the "ship augers" or electricians bits have no spur. Some of these are known as "nail eaters" as the are meant for plowing through wood for wiring or piping and they just need to aggressively hog out material. The nature of the cutting edge (almost square) lends itself to tearing through rough material, even the occasional nail, without losing the "edge". ("edge" is used very loosely here, like the "edge" on a pick-ax!)
Also of interest is the Wood Owl bit. It has three spurs and three flutes. The spurs are shaped a little differently than conventional spurs. They cut extremely well but are a little trickier to sharpen. They sell special files for them. They are also pricey. I don't know if they're adaptable to boring machines (I'm not sure of the shank size). I have only used them for peg holes.

A flat side can easily be ground on to a round shank. It only needs to be enough to allow the chuck screw to grab hold and prevent rotation. Milwaukee makes a spurred 1 1/2" bit that works nicely in my Boss Double Eagle boring machine.

Also refer to Jim Rogers tools in this forum.