Perry, it's a nasty business this job search. If it's any consolation, everyone goes through this to a great degree. An investment bank which shall remain unnamed was inteviewing me on and off for 5 months. I had 13 interviews... each about hour long. I had to complete a programming assignment (started at 9 p.m. finished 5 a.m. next morning) then reworked it over the weekend the way it should've been done and resubmitted. All that, for rather mediocre salary, but we never even got to that part!!! My 13th interview was w/ a partner (that would be a guy worth several millions a year, why the **** would he care to even know about a programmer in a group two blocks and 40 floors away?!!!) anyway... he didn't like me... by-by...
I was so mad because of all the time I lost and all the stress. And of course it wasn't helpful in terms of other searches, and of course at work they noticed some activity... that's never helpful.
In the end, I think I am better off not having that job.
As a side note, I think you have to do whatever is best for you. These guys didn't want to play honest, you had no moral obligation to play honest yourself. It's a totally different issue that you don't want to work w/ people who lie on the first day.
my $0.02
--al