As I reported on November 18, two days after the royal engagement announcement, if Prince William doesn't receive another title before his marriage, his bride will officially become "Her Royal Highness, Princess William of Wales," not "Princess Catherine." The sons of the monarch traditionally receive a dukedom or an earldom when they get married, such as Prince Andrew who was made the Duke of York on the morning of his wedding. Therefore, his bride Sarah Ferguson became Duchess of York, rather than be known as "Princess Andrew."
The latest reports from London is that William has asked the Queen to not give him a ducal title, preferring to remain Prince William. Also at his request, the Queen is considering making Kate "Princess Catherine," which means that she will be a princess in her own right, not just through marriage. If that happens, it will be a huge deviation from royal custom which decrees that only princesses of royal blood have the privilege of being styled a princess with their own name, such as Princess Beatrice of York and Princess Anne.
The only precedent of a non-royal born woman in the British royal family becoming a princess in her own right was in 1974, when the Queen made the widowed Duchess of Gloucester, Princess Alice. However, this was only after Alice had devoted decades of service to the Crown, and the new title helped differentiate her from her daughter-in-law, the current Duchess of Gloucester.
So a decision to allow Kate the "Princess Catherine" title right after marriage will be significant - and a first. Whatever happens, Catherine will become Princess of Wales (Diana's title) in due course when Charles takes the throne, and William becomes Prince of Wales.
By the way, there is absolutely no question of Charles being passed over in favor of William. Public polls may show that many Britons prefer to have William instead of Charles as their next king, however the royal family does not run according to public opinion polls. Not even the Queen can make that kind of decision without the consensus of her government and Parliament.