I've never seen pistons gouged so badly. I wonder what happened to this engine.

Also, you can easily get a rod knock even with oil pressure. If you spin a rod bearing at all (like could happen if someone ran it out of oil) you'll get the same sound.

 

Dang, those are some thrashed pistons! That's about as bad as I've ever seen them come out of an engine that was running and not seized...

Looks like the piston in my chainsaw after I accidentally ran straight gas in it...

I would concur with the washout theory.