Please check whether this is correct or not

Sally wandered along the path thinking aloud; "If I continue this diet, I should lose ten kilos by the end of this year." Suddenly Sally heard, "Watch out!". "Oh!I'm terribly sorry," he apologized. "I was so caught up in my thoughts I didn't see you!" he managed to stammer. Smiling, Sheila responded, "It's ok.Nothing's broken...No really, I wasn't watching my step either." Suddenly they both stopped making excuse and stared at each other. "Don't I know you from somewhere?" inquired Sally while Sheila exclaimed,"You're Sally, Sue's sister, aren't you?!" They both began to laugh as they had met each other the week before at a party that Sue had given. Still laughing, Sally suggested, "Why don't we have a cup of tea and cake?" to which Sheila replied,"I thought you wanted to continue your diet!" They both were still laughing by the time they reached the cake stall.

I am supposed to change the text above to reported speech. But sometimes, I am confused by the "backshift" rule, where the tense must be one step further. I don't know if I make any mistakes here. Please check whether I have made any mistakes.

Sally wandered along the path thinking aloud that if she continued this diet, she should lose ten kilos by the end of the year. Suddenly, Sally heard someone yelling to him to watch out. She apologized and told her she was terribly sorry. She stammered that she was so caught up in his thoughts she didn't see her. Sheila was smiling and assured her that it was alright, nothing was broken and she wasn't watching her step either. Suddenly they both stopped making excuse and stared at each other. Sally asked Sheila if she knew her from somewhere while Sheila cried that she is Sally, Sue's sister. They both began to laugh as they had met each other the week before at a party that Sue had given. Still laughing, Sally suggested that they had a cup of tea and cake to which Sheila replied that she thought Sally had wanted to continue her diet. They both were still laughing by the time they reached the cake stall.