。
She was lost in fond memories.
Literal
She [topic-は] nostalgic memories [in-に] indulged.
懐かしい is one of those Japanese adjectives that doesn't translate cleanly into English — it's the warm, slightly melancholy feeling of fondness when something from your past comes back to mind: an old song, a childhood smell, a face you haven't seen in years. ふける (typically written 耽る) is a literary verb meaning 'to be absorbed in, to indulge in, to lose oneself in,' often used with abstract nouns like thoughts, memories, reading. 懐かしい思い出にふける = 'lose oneself in fond memories' is a near-set collocation, more written or reflective than something you'd say in casual conversation.