Hey everyone,
Thanks for the great discussion! I really didn't expect everyone to be posting about it.

It's good to see opinions on both sides, not being one-sided.
I'm not saying AI Diplomacy is perfect, I don't think anyone here is. It can use some work to iron out its flaws. Some of the "permanent" penalties I'd love to see fade after some time. It would also be nice if there were a few more modifiers (positive and negative) added in.
Though some of the remarks here I'd like to dispute some. Particularly people playing on Immortal and Deity having issues about frequency of wars declared. These are the hardest difficulties in the game (essentially "Nightmare" mode) so they should be suitably frustrating to beat -- one way to handle that are wars, after all. Especially considering the production advantage of the computer.
In an example of my original post, to explain what I mean about AI Diplomacy;
I'm playing as America (King Difficulty) on Continents. I spawn on the eastern part of my continent with Siam to the north, Babylon to my west, and Russia to my northwest. My second city is to my west but I left plenty of room for Babylon to expand eastward. My third city is to my northeast very close to Siam and that causes tensions (covets my lands). My fourth (and final) city is to the south east far from everyone. It doesn't take long for Siam to become Guarded, but Babylon likes me quite a lot (I've left him plenty of room to expand) and we soon develop a friendship, including trade and me providing sources when he asks. This alliance will last for most of my game because we DoF, trade, and denounce together. It's made stronger when Russia up north gets antsy and starts declaring wars against me and Babylon (diplomatic bonus for fighting the same enemy). Most of these wars I simply guard my second city in the north west and slaughter Catherine's soldiers in droves (favorable defensive terrain) and we go through several peace treaties where she never has any hard feelings (since I never take any of her cities).
Once things stabilize a bit and after those wars are over, I mass up and declare war on Siam. They're isolated north of me and already don't like me due to coveting my lands. They're friends with no one and we've not met anyone from the other continent. Russia is a warlike civilization so she won't mind me declaring war, and Babylon being my steadfast ally won't mind either since we're friends. So it's a no brainer opportunity, I raze two of Siam's cities, puppet two more, and leave them with a tiny city in the desert with a lot of poor coastline. They hate me for it, but I take no diplomatic penalty with anyone over this war. Siam eventually cools off about it a bit, but they remain Guarded (due to many penalties).
With all my new wealth I upgrade units, recruit more, and take stock of the situation. I've still not met anyone else but Babylon and Russia; the latter will be a problem since she's got about as much score as I do. Babylon is squarely behind me in strength, tech, etc. So I declare war on Russia; normally at this point I'd be labeled a warmonger but I'm friends with the only other civilization (that matters) besides Russia and they're both enemies. The war spans the Renaissance era but eventually I capture one of Russia's city states and puppet three of her best cities, raze the rest. Babylon captures an enemy city, leaving Russia with a single city in the tundra. I sign a peace treaty with Russia. By the time we make peace, I've built a caravel and sent it exploring -- making contact with the other civilizations: China (weaker than me), Egypt (equal to me), Rome (stronger than me), and Japan (very weak). Neither Egypt or China like Russia so this is a perfect opportunity for me to Denounce Russia, earning me a positive modifier with the other powers.
Babylon eventually wipes Russia off the map, taking the diplomatic hit for destroying a civilization completely. Soon the other powers become wary of Rome and begin declaring war on them. I've signed DoFs with Egypt and China, creating a friendly bloc between America (me), Babylon, Egypt, and China against Rome (everyone hates Rome at this time). Since they're the strongest, I denounce them and declare war alongside the others (planning to eventually take them out as I mass troops, research tech, etc). During this time of intense interior development (consolidating my lands), I miss the warnings that Babylon and China are no longer friends with Egypt-- and because of this when I renew friendships with Egypt I take a diplomatic hit with Babylon and China... sending the latter into Guarded. This single DoF begins to completely unravel my alliance with Babylon, and I watch their status as the negative modifiers begin to pile up (made friends of their enemies, they covet my lands, they covet my wonders, they believe me to be a warmonger). It actually doesn't take long at all for this to happen and soon Babylon denounces me and becomes Guarded.
The Declaration of War happens a few turns later, which I fully expected at this point. By now we have both filled out the entirety of the continent and our borders stretch all the way from the north pole to the deep south-- a very long division considering how the war with Russia had played out (divide and conquer). One of Babylon's city placements cuts my empire in half; my American cities split from my Russian puppets (only one on the coast and hasn't built a harbor yet) thus trade and troop movement between my Russian puppets and rest of my nation depends on Open Borders with Nebby. Babylon has been building a massive army in this time, with lots of cavalry, riflemen, cannons, and artillery. My tech is similar but I have destroyers, anti-tank, infantrymen, and artillery. The entire continent erupts into a massive WWI style war with the battle-line literally the entire length of the land. My trade takes a hit, but nothing major. However happiness lost from trade routes sends me into -4 unhappy.
Babylon has a nearly 30 units really hammering my puppet Russian empire. Luckily I took the time to station artillery in all of my cities and I also had a Citadel (guarded by infantry) 2 squares away from Venice (only puppet city on the coast, and closest city to the Babylon city cutting my empire in half). I have a great general stationed in Venice, giving even more bonus to my infantry in the citadel. If not for that citadel, the artillery in all my puppet cities, I would have completely lost Moscow and very likely Venice-- The Kremlin built in Moscow (how appropriate of the AI) really helped, too. 20 or so other Babylonian units had the rest of my army bottled up in the south around my American cities, so I couldn't help my puppet cities. But I managed to barely hold Moscow and destroy many units, both in the north, the central area, and the south. I'm glad I built Himeji Castle since at this point most of the battle was in my territory.
After stabilizing the situation I've begun my offensive to take two of Babylon's cities-- The one near Venice that divides my nation, and a different city in the south-west (good staging point against Babylon's capitol). I signed a peace treaty with Rome since I had no intentions of fighting them for a while, and notice they're Friendly and desire relations with my empire (bonus!). Egypt is still friendly as always, and China has denounced Babylon.
So far this war has been extremely fun and tactical due to my Empire being cut in half (and having to deal with that), and the sheer length of the battle line and units involved. At first I thought it would be a diplomatic disaster, but it seems like I'll be able to work this one into a favorable position with the others powers. I know China and Rome don't like Babylon, now I just need to wait and see if Egypt follows suit.
That's where I last saved.
You can definitely have alliances/good diplomacy, even while being at war the entire game and conquering other nations. You just have to tread carefully and plan out your diplomatic decisions. If I didn't sign that second DoF with Egypt, I'd likely still be allies with Babylon and instead invading Rome now. Interesting how a single screw up completely changed the game.
Sorry for the long post.
