Halliday & Matthiessen (2004: 465-6):
Strictly speaking it is not so much intermediate [between direct and indirect speech] as a blend: it has some features of each of the other two types. The structure is paratactic, so the projected clause has the form of an independent clause retaining the mood of the quoted form; but it is a report and not a quote, so time and person are shifted. This is another example of the semogenic principle whereby the system fills up a slot it has created for itself. … To accommodate free indirect speech in our account, we thus need to [dissociate] the quote vs report variable from the parataxis vs hypotaxis one … Free indirect speech can be projected both verbally and mentally, and includes both propositions and proposals — everything, in fact, that can be both quoted and reported (thus excluding minor speech functions since they can only be quoted).—
* 'Free indirect speech' encompasses a range of different feature combinations; it is a projection 'space' rather than a single invariant pattern. The account given here represents it in its prototypical form.