What is happening to the Subjunctive case in English? It seems to be dying, but I wonder if it was ever very vital to our language.

The subjunctive is alive and well in noun clauses following adjectives or verbs of urgency, necessity and so on. "He demanded that I be quiet." ESL students are still required to understand it in standardised language tests like TOEIC and TOEFL. It's not vital, I guess; the meaning of a sentence is usually just as clear with or without the subjunctive. "It is essential that correct grammar be/is used."

From "The King's English" (Fowler and Fowler, 1906):

'The use of true subjunctive forms (if he be, though it happen) in conditional sentences is for various reasons not recommended. These forms, with the single exception of were, are perishing so rapidly that an experienced word-actuary puts their expectation of life at one generation.'

The word-actuary was right. 'If I were you...' does still linger as the only form of conditional subjunctive. Again, it's not necessary, and 'If I was you..' is just as common.

Newnickname's answer is a good one, and I'd merely like to add an observation about use of the subjunctive in "if" clauses. To show clearly these are not just conditional, but contrary to fact, then careful speakers still observe a distinction. "If I were you" is always in order, apparently, since I am clearly not you, and couldn't be. For me, "If I was you" is just plain wrong, except perhaps in some science-fiction scenario about exchanged identities, which I won't get into.

On the other hand, without any very improbable context, we can easily see that "If John were king" and "If John was king" can both be approriate. The first is what we would normally say where it is clear that John is not, in fact, king. But suppose you claim that John was king of England in 1400. If I wanted to allow that maybe you were right, but still express my skepticism, then I could well say, "If John was king of England in 1400, then all of my history books are wrong." I'm avoiding saying that your assertion was flatly contrary to fact.

I'm all in favor of maintaining even marginally useful distinctions like this one. But as newnickname says, it is most likely on its way out.

contrastly,
"if i were a princess" is using proper English.
"if i was a princess" is just plain lazy, but since so many people find it nicer to speak lazily, it has become "accepted" in American speech.
my british friend said that she would never say "if i was..."

I agree completely, Maiku and Hassia, but only because I like understanding "proper" grammar.

However, you both must notice that "to be" is the only verb that actually changes form in conditional sentences. For example, the confusion Maiku states would come from saying, "If I was king" to discuss an unreal situation comes about naturally in sentences using any other verb form:

"If she met Bill Clinton, she would ask him a lot of questions."

"If she met Bill Clinton, then she must have some interesting stories to tell."

The fact that the first verb doesn't change doesn't cause much confusion, since the second part of the sentence makes the intention of the verb "met" clear. The same will happen when "If I were" dies in English. I don't think it will cause much confusion. When people say things like, "If I was king, I would be rich," we all understand what is being said. There's no confusion. I'm not even sure how it can be construed as "lazy" to say "if I was," since it doesn't really take any more effort to say "were" than it does to say "was." I think it has to do with what sounds correct to a person from a certain region, not laziness.

I'm curious to know, though, if there was ever a verb form for verbs other than "to be" that changed in the subjunctive in conditional sentences. Was there ever a clear subjunctive verb form in English that didn't simply look like the past tense?

I'm also curious to know whether linguists think sentences such as the ones Newnickname metioned are on their way out, as well. For example, will we one day be saying, "He insisted her to leave" rather than "He insisted that she leave"?

Finally, did English ever allow sentences like, "He wanted that she leave," which would be a perfectly acceptable sentence in languages that still use the subjunctive frequently and clearly, such as Spanish?

Sarai, it does seem that the form is on its way out. Cambridge Encyclopedia of the English Language calls it 'obsolete'. But forms like 'God save the Queen' will persist, and no doubt will be considered simply idiomatic.

In examples using verbs other than 'to be', used in subordinate clauses the subjunctive is the same as the infinitive (without the 'to') regardless whether the tense is present or past. e.g.
They ask that we pay now.
They asked that we pay immediately.

The tricky part is that in the present tense the subjunctive is the same as the indicative, except in the third person:

'We suggest that he leave soon.'

Subjunctive has three uses:

(1)mandative (expressing a command or suggestion)
-see example above, and NNN's 'urgency and necessity'.

(2) conditional or concessional (not used in past tense, and only used if the condition is hypothetical)

e.g. 'Though he ask a thousand times, the answer is still "no"', 'If I were rich...'

(3) expressing a wish (archaic)
e.g. 'God save the Queen', 'Far be it for me to interfere'.

In the past (tense) forms, the only one that is different from the indicative is 'were'.

I'm so glad it's going! Even the distinction between an open condition (If I go to sleep...) and a hypothetical condition (If he had recognized us...) seems too trivial to justify an entire grammatical category and a set of clunky rules of usage!

But 'insisted her to leave' wouldn't work because 'her' is an objective form; maybe 'he insisted she leave' with 'that' understood.