I stopped at a friends house on the way home and used a compression tester to verify. The cylinder had about 5 psi of pressure! I was hoping that a valve was stuck open so about a week later I grabbed a head from Pick & Pull (a story in itself). I cleaned the head up and waited for new gaskets to arrive.
Look at the third valve on the bottom row


The chunk taken out of that valve was really big. Larger than a new eraser from the back of a mechanical pencil. There were no marks on the cylinder wall or the piston head. I removed the entire exhaust to shake and turn up side down and the chunk was no where to be found?!
The people at Pick & Pull are dicks and wanted to charge extra for ever single part (even 1.75 for each head bolt!) so I had to swap everything from my old head include came retaining bearings.

Now for the fucked part of the story.
I put everything back together and started to fill with water. I heard a tap tap tap under the car. It was coolant dripping down onto the newspaper. I traced it to the water pump. I assumed it was the gasket since the pump was new as of 8 months ago. I went to the local dealer to get a gasket and took the damn timing belt out again.
Filled it back with water and .... dripping again!!!! I was very careful to drain it out, dry everything thoroughly and have someone fill it while I watched. It was leaking from the damn weap hole on the pump housing near where the bearings are! I had never seen it before.
I couldnt find my receipt for the pump and of course the parts store couldnt find my information in the computer so I had to buy another one. Again I took the timing belt off.
It ended up taking me a good 6 hours but the car runs perfectly yet again

What I can say is that Im impressed at how well the car ran with only three cylinders. I must have driven 300 miles before fixing it and didnt even get a check engine light

The car has nearly 250k miles and I have driven it like I stole it every day since 120k.
One word of advice - My only guess is that some of the "ceramic coating" created by Steal Seal must have got on the valve land and caused it to snap. Steal Seal does work but it should only be used on an engine you plan to junk. If you ever take the engine apart after using it you will find the entire piston/valve/head covered in a ceramic like coating that has to be chipped off.
Because of this and other Subarus (including two dohc RS) I am a timing belt and head gasket ninja. For thanksgiving I took the engine out of an RS and replaced nearly every wear item including clutch and rear main seal.
Oh and Hi to everyone