KillZone 2's trailer was created entirely in art programs, it was about as real as a Pixar movie. "In Engine" means that everything you see in this trailer was playing in the game's engine, but it doesn't necessarily means it was playing in realtime, nor necessarily that everything is an in-game effect - you can make game engines take like a minute or longer to render a frame, yet render all the frames as if the game was running at a solid framerate. And they could also in theory include short pre-rendered videos as effects, such as a video of volumetric smoke that they place on the top of the volcano.
In Unity for example, if you set Time.captureFramerate to 60, the game will run the game updates and render as if it was a smooth 60fps, regardless of how long it takes to actually render each frame - the game will run in slow motion if it has to, rather than skipping frames. Then you write each frame to disk, make it into a video running at 60fps, and there you go, a pre-rendered in-engine trailer that looks great.