Cars don't seem to like my family lately. In November, my wife's car had to have the radiator replaced among other repairs (almost $2K) because oil leaked into the coolant. Last month, she needed to have the horn replaced. Yesterday it was the water pump. On the next to last day of the year, we were on the way to get a new car for my daughter when her car died so we had to have it towed back home (still sitting in the driveway) and couldn't even use it for a minimal trade-in. Anyway that's all just venting. The current issue follows.

My 1999 Subaru Forester has been having an intermittant problem lately. When I shift into drive, the transmission doesn't engage for a little while, sometimes a few seconds, sometimes over a minute. Once it engages the car runs fine. I dropped it off at a local Lee Myles yesterday and they just called. Its apparently an internal problem, so they have to open it up. The charge for an internal inspection is just over $500 (7 hrs labor).

First question is whether that's reasonable. Second question is anybody have any suggestions on what might be wrong (and how much it will cost)?

My guess is the symptoms you've described occur more when the transaxle is cold than once it has been operating and is warm.
Before they go inside, they must have done a line/operating pressure test (I hope).
If the line pressure test shows too low line pressure, there are a couple of things that can cause this. Problem areas include, but may not be limited to low fluid level, worn pump and/or seal leaking and allowing fluid to bypass.
Cost will vary widely depending on which component(s) have actually failed.

Yes, he said they were going to do a pressure test. When he called, he said the pressure test and their exam didn't reveal anything external, so they have to open it up. I'm assuming that meant the pressue was OK.