BigAl,
No, the industrial engine doesn't have a filter. There's no visible difference between the industrial engine and the standard type 1 engine as far as I can see. Probably just beefier bearings and such.
A filter is a good idea. There's no need to split the case to add one, you just have to get it in line of the oil flow, that is to say downstream of the oil pump to receive full oil flow. There's a variety of ways to "full flow" the engine case. Some folks tap the outlet hole in the oil pump and plug it, and then tap an outlet in the face of the oil pump. This will pump oil out of the engine case and through your filter, cooler, etc. Now you need to get it back into the case in a location where that filtered oil can do some good. You can tap and pull one of the engine plugs and then install a hose barb. Anyway, I'm not going to go into anymore detail because you don't have to go through all that.
I installed a full flow oil pump made by CB Performance (
http://www.cbperformance.com/catalog.asp?ProductID=197). The cover has an inlet and an outlet already tapped (3/8" npt). To install it all you'll need to do is remove the engine pulley, remove the front engine tin that sits behind the pulley. You'll see the oil pump cover behind that, remove the 4 nuts holding the cover, and pull the oil pump. You should buy an oil pump puller for the few bucks that it costs. If your time is time is truly worth nothing, then you can fabricate one.
I had to do some drilling and grinding on the new pump as it's substantially thicker than the old pump cover, and the studs didn't extend all the way through it. That's it. Add some fittings and hose, get yourself an appropriate sized filter housing and filter either from a bug parts place or NAPA, etc. and your good to go. One word of caution. I've read of filters blowing out during cold starts as the viscous oil is under high pressure. You can get a thermostat sandwich adapter that sits between the filter housing and filter. It will bypass the filter until the oil warms up.
I just went through all of this, and I'm sorry I didn't document the process with photos! Good Luck.
PS. I added the full flow pump with the engine in the Snow Trac. Easy, no need to pull then engine. I imagine you could do the same in your KT*