Although being a mermaid is more interesting.

I ignore the sequel and believe she were a mermaid before!

well, we already know that she was Triton's sister.

I don't believe she was never in the palace, but I believe that she was born Cecaelia. I had a feeling she worked for King Triton or something and went power-hungry and was banished. However, since the idea was scrapped from the movie of them being brother and sister I don't consider that canon (even though it was used in the Broadway version).

I remember it being mentioned on the dvd features that she's suppose to be King Triton's sister who was banished out of the kingdom years ago.

She could have been a mermaid named Vanessa and when she became a Cecaelia she changed her name to Ursula.

I believe that both she and Morgana were both mermaid princesses. However when Morgana was in her teens she became jealous of her siblings because of how perfect they were her father favored Triton and her mother favored Ursula. So she decided to take power but she wasn't strong enough to handle the power of the trident or the shell so she lost control and it exploded all up in her face. As punishment her father banish her and turned her into from a beautiful mermaid into a hideous cecaelia. As for Ursula the mother is dead and her father was on his death bed and he divided the kingdom into two. Ursula got his magic shell and half the sea as well and his trident went to Triton and so did the sea. However Ursula became mad with power and wanted more she wanted it all to herself. She used dark magic to take over the sea but Triton stopped her. Just like with Morgana she was banished and changed from a beautiful mermaid to a hideous cecaelia.

^really intersting story KataraLover!

She probably was in the palace, though. She says something about her being the right soverign, i think. I don't think she is Triton's sister, they would have mentioned that.