I was playing that game with brainbomb and the player in question. His personality puts him very squarely into the PPSC mentality, in that he feels an ally's victory achieved with his help is victory enough for himself. To answer the questions directly:
No, playing Diplomacy isn't a waste of time if you're personally/morally opposed to lying. Firstly, there are many ways of justifying being fast and loose with the truth. Sure there are outright lies, but also lies of omission and of vagueness. You can justify it being in the spirit of the game. If one's opposition is not so easily overcome, why not be straightforward with everything? It does put you at a bit of a disadvantage, but in a circle of F2F players, reputations have a habit of growing, and it can be turned to your advantage.
It's an understandable sentiment to tone down the ruthlessness against new players, but at the same time they will invariably be stabbed by an ally if they play enough games. Everyone learns to adapt, so why let them waste their time building up this illusion of endless loyalty?
The last point may turn out being the most difficult one for the player in question to adapt. There are times when you need to prop up a neighbor against a bigger threat, and other times when it's more appropriate to rush in and take everything you can. Learning which situation calls for each approach only comes with experience.
Like I said, his mentality is very PPSC-oriented, and since there are no points to distribute after a F2F game, his own opinion of the result is the only one that matters to him. That said, brainbomb, hassle him to sign up on webdip and I'm sure he'll very quickly settle into whatever style suits him best.