No, you do not need a passport in May 2007. However, if her birth certificate has an error on it about her sex you still may have a problem. You need either original or certified copies of birth certificates (from an official or agency, not a notary) and photo IDs in lieu of passports to board the ship and to re-enter the U.S. If her birth certificate says she is male it may not be accepted.
The cruise is still 5 months away. You are still outside the window for when they start keeping money for cancelling. You should be able to get all of her money back.