Here's the final outcome:
Had 25 lbs compression, leak-down test revealed burned/damaged exhaust valves.
Given 148k miles on the engine and the tendency to blow head gaskets, decided on a rebuilt engine rather than pulling both heads etc.
Emily at CCR (303-293-9230) was very helpful in discussing the alternatives; they supplied the rebuilt engine for $2,695. Strictly Automotive in Denver (303-436-1700, talk to Greg of Steve) did the diagnosis and put in the rebuilt engine. Also put in a new clutch including the "snout mod" to the housing.
Runs great and I highly recommend CCR and Strictly. They are straight shooters, competent, and honest.
As for Subaru, I'm very disappointed. A well-designed and well-built enigine should go 250k easily, but these engines start having problems with head gaskets as early as 70k. I didn't have the head gasket problem, but it influenced my decision to go with a new motor and more $$$.
Bottom line: Subaru is trashing their reputation for reliability. I'll never buy another Subaru unless it's with the old 2.2l that has proven endurance.
In Subaru's defense: I neglected to do the valve adjustment at 105k(thought they were hydraulic like the 2.2l, oops. . .), and I suppose this could have prevented the exhaust valve damage.
Thanks, everyone, for your past inputs!
Herb