Step 1: Concept
Reporting a statement in the past tense requires shifting the tense of the reported speech (Backshift).
Step 2: Analysis
- Reporting verb: "said" (Past tense).
- Pronoun shift: "I" becomes "she."
- Tense shift: "am" (Present) becomes "was" (Past).
Step 3: Conclusion
"She said that she was happy" is the correct indirect form.
Final Answer: (3)