That is a direct quotation of Sally, and it is embedded in the text, not taken out and put on a separate line or in a block quotation.
An inderect or paraphrased quotation would be more like Sally, hilariously, insulted the monster's intelligence as she ran.
That is a paraphrase of what Sally actually said. In a research paper, both kinds of quotations need to have citations, but this kind is in my own words, and doesn't directly quote Sally at all... just indirectly, with a paraphrase. The quotation, however, is still embedded in the text and on the same line as everything else.
For a non-embedded quotation, in a normal paper you would take it out as a block quotation:
GET AWAY from me you idiot monster! Your Mother was Grendel and your Father was Cookie Monster. You're the most dumb, idiotic, freaky, slimy, joke of a monster that I have ever seen! Stop chasing me! I am just trying to bring you your stupid dinner! Stop! You IDIOT!
In this sort of a quotation, the entire quotation is removed from the other text and indented together (a block quotation). In published materials, sometimes quotations will be put into separate text boxes and the font size will be enlarged... same idea. The quotation isn't embedded into the text anymore, but is instead separated and more attention is called to it.