I have a 1997 Camry 4-Cyl and have tried to stay informed about the "Sludge Issue". Here is what I have put together so far:
1) The 1997-2001 Toyota 3.0L V-6 engines have the worst tendency to sludge.
2) The 1997-2001 Toyota 2.2L 4-Cyl engines also have a tendency to sludge, but not as bad as the V-6. I got a letter from Toyota extending my engine coverage for my 4-Cyl, so there must be something "wrong" with the 4-Cyl.
3) There have been comments that any Toyota Camry 4-cyl engine 1992-2001 will sludge easier than other engines, but there is very little info on this.
Now, regarding your Camry questions, it is clear that running that low on oil is bad. I do not know how to advise you, but here are some ideas:
A) Eduacate the daily driver of this car that car maintenance cannot be ignored!
B) If they didn't check the oil, then they didn't check anything else. Potential SAFETY issues! Ensure that the rest of the fluid levels are OK, check the tires, air filter, etc.
C) Change the PCV valve. Poor ventilation is one of the reasons that the Toyotas had sludge problems.
C) Change the oil & filter several times, perhaps at 3 week intervals with your favorite oil - nothing exotic is needed at this point. Do it yourself and look at the oil coming out. Also look at the engine internals where the oil filter mounts. This step will hopefully work cleaner oil back in the engine so that it is lubricated again and maybe remove some dirt. In this step you are trying to stabilize the patient and "do no further harm". Hopefully, engine noise will decrease.
D) Assuming that (C) is successful, then consider doing further treatments with AutoRx. I have never seen it, but others on this board think that it is wonderful stuff. It even cures cancer! Others can advise you on AutoRx use. In any case, consider how much time, energy, and money you want to spend on this car before you get too excited.
E) The timing belt should normally be changed every 60K miles.
F) Change the coolant.
G) After you get things cleaned-up a bit internally, if this engine starts blowing blue smoke on cold-starts, then most likely the valve-stem seals need replacing. This is usually not a big problem and people have driven for years with this. Note, however, that this is a rather big job to fix and likely requires that the head be removed. I had it done on my car. Based on others comments and my own experience, I think that you are going to have this problem. If you want to get it fixed (remove head, $$), then that should probably be a factor in your planned efforts to clean the engine internally.
H) I do not know how much oil your engine requires. My 1997 Camry 4-Cyl takes almost 4 quarts. If you don't have the User Manual, then a Toyota dealer can tell you.
Best Wishes as you motor along!
SWS