Ouch! That pinion gear looks like toast!
If you want 4.44 gears, the person to talk to is svxfiles. He's the grand-daddy of 4.44 gears.
The most straight forward way to switch to 4.44 gears is to swap in a nice low-mileage used trans and matching rear diff. The '96-'98 Legacy Outbacks came with a 4.44 geared transmission and rear diff that'll be a good match. Large junkyards will have these parts in abundance, and you could probably pick up a complete set for ~$500-$600.
Good luck!
-Chike