Halliday & Matthiessen (2014: 532, 532n):
… there is another mode of projection which is sometimes described as ‘intermediate between direct and indirect speech’, namely free indirect speech:³²Quoted (‘direct’) ‘Am I dreaming?’ Jill wondered
‘Free indirect’ Was she dreaming, Jill wondered
Reported (‘indirect’) Jill wondered if she was dreaming
Strictly speaking it is not so much intermediate as a blend: it has some of the 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 reference are shifted – was she not am I. This is another example of the semogenic principle whereby the system fills up a slot it has created for itself.
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³² ‘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.