Hi,
Well, my take is going to be slightly different....
Frankly, I am not sure that many people have a really accurate understanding of how the martial arts really developed. What has been handed down did not, for the most part, have it's origins on the battlefield. And that's perfectly fine, because they are not teaching killing skills as a primary goal, regardless of point in history. Even the vaunted Musashi quoted above was making his comment only in regard to actual combat, not as an over-arching statement on life. He actually specifically put his guides for life down on paper, in the form of the Dokkodo, in which he advises, amongst other things, to cultivate interests in other arts, and to not let future generations have an attachment to weapons. Not exactly a "kill kill KILL!!!" type of thought pattern...
Although Musashi survived (prevailed in?) quite a large number of violent, life and death encounters, by his own account, he "won" only by luck, and sheer brutality, rather than by Hyoho (strategy) or superiority of technique. It was only after he lad left this life behind that he began to formulate his Hyoho and by extension his art of Hyoho Niten Ichi Ryu. So if he didn't actually use his technical superiority, or his understanding of deeper strategy to survive so many duels, and his art was created seperately from such encounters, can it really be said that it was created on the battlefield?
The thing to remember about martial arts as a study is that they are not, nor have they ever been, for the mass army to learn. They are a specialised area of study using combative techniques to teach the lessons that they want to get across. If you think of martial arts more like a University Masters degree you're more on the right track. Martial arts were studied by the elite, the generals, the rulers and leaders of armies, not the soldiers themselves. They would be lucky to get basic instruction ("You hold the blunt end, and just keep jabbing the pointy bit at the other buggers until there's no more of 'em. Or they jab you good and proper, of course.... try not to let 'em do that...."), with the more organised and professional armies getting more of a chance to practice and drill, but still essentially being rather basic in their technical approach. There really is no place for martial arts-style techniques on a battlefield.
This of course brings us to the question of what martial arts are really designed for, and what they are supposed to teach, if not battlefield survival skills. Well, that's a lot of different things, really, depending on the system itself. The Hyoho Niten Ichi Ryu teaches Musashi's approach to life, his Hyoho, his spirituality (Bhuddism), and more. It teaches a determined mind-set, and a "don't give in" attitude. It teaches you to commit to seeing through any action you take on. And it does this through the medium of swordsmanship.
So as to whether or not the arts these days have lost the "martial" part of their teachings, well in a very real way, they never had them. They are romanticised to make us think they did, but that idea simply doesn't hold up. Martial arts simply teach nothing that is battlefield in anything other than symbolic methods, they teach with techniques that would be completely out of place on a battlefield, they often teach weaponry that would not actually be found in the combat of their day and so on.
What happens with each new environment, though, is that the way things are taught adapts to the new environment it finds itself in. Sometimes that is interpretted as "watering down" the system, but it's really not. Each society will take from the arts what they need, it seems that at present the primary need is more on social skills, often engendared through competitive systems, rather than the handling of violence. As mentioned, in todays sue-happy society, arts teaching "The True Deadly Methods of The Secret Assasin Cannibal Tribes of Western Iceland, Every Move a Lethal Destruction Outlawed in All Decent Societies From Here to The East Indies!" are simply not required. And if you do need immediate methods of handling real violence, enrol in a Security Training Course, or do some RBSD courses. But as they don't have anything to do with the army (the military), you can argue that they aren't "martial" either (meaning doing with the waging of war).