Should the Valve Adjustment Screws look like this?

Click to view attachment

They look pretty beat up.

Could this be the source of my egine knocking?

It would probably make some noise with those, but I don't know if you'd describe the noise as "knocking" particularly. I think it would be more of a "valves too looose" clatter kind of noise...

--DD

Looks like Galling from lack of lube.
Lack of lube could lead to loud knocks in the rod bearings which of course is terminal.

Oil pressure on gage is not always a good indicator. pressure in one part of the motor does not mean oil pressure everywhere.