- The Catholic Church still recognizes Protestants as Christians, just as it always has.
- The Catholic Church still recognizes Protestant baptisms as a valid Catholic sacrament.
- The Catholic Church still recognizes that Protestant baptisms incorporate people into the Catholic Church, because it is a Catholic sacrament, even though full communion with the Catholic Church remains incomplete due to Protestant schism with Rome.
- The Catholic Church does not recognize the artificial organizations (denominations, affiliations, associations, etc.) created by Protestants as "churches" in the proper sense, because they were not founded by apostles, nor have the preserved the rest of the sacraments. Rather, the Catholic Church recognizes them as man-made Christian "communities."
- The Catholic Church recognizes that God still uses these man-made Christian communities to teach people of Jesus Christ.
The whole thing centers around baptism really. You see when Protestants baptize, they see the process as incorporating a soul into the "invisible" Church as well as the particular denomination one was baptized in. The Catholic Church, however, sees it much differently. Baptism and marriage are the only two Church sacraments that Protestants have preserved. The origin of Christian baptism, and Christian marriage, find their beginning in the Roman Catholic Church. Therefore, their sacramental nature has a distinctively Catholic identity. When a person is baptized in a Protestant organization, that person essentially receives a Catholic baptism. (So long as the baptism is done in the Trinitarian formula.) That being the case, what results is a baptized Catholic who is not confirmed. That's essentially what Protestants (of all types) are -- baptized Catholics in need of good education and the sacrament of confirmation. Most of these people will never see that happen though. Instead they'll attend their Protestant denominations and receive a religious education that is lacking many key Catholic elements.
Since Vatican II many people were under the impression that the Catholic Church changed it's beliefs concerning this matter. Having read the Vatican II documents myself, I can testify that there is nothing contained therein to suggest such a thing. The teachings of the Second Vatican Council are consistent with the 1950's Catechism I keep in my home. So nothing changed here in regards to Church teaching. What Vatican II did was clarify.