Gen I Prius - 80k miles - needs new transaxle - is this covered under warranty?

Hi - I'm new here and in a bit of a panic as to how/if to fix my 2002 Prius and would really love some info on the warranty if anyone has it. All the info I have is in my glove box - at the dealer's garage. Not much use to me now. Here's some brief background:

I own a 2002 Prius with 80,000 miles. It's been working like a charm - and I have had zero complaints. Until...this past week the warning lights lit up (with no other symptoms that I could detect) and I called my local Toyota dealer - where I bought the vehicle used 2 years ago. They said, as long as it was running ok, it was ok to drive it <10 miles to get it to their shop. Which I did, without incident. They ran the diagnostics, found nothing wrong, turned off the warning lights, and sent me home. On the way home, the warning lights came on again. I tried to drive it back to the dealer, the car started revving and acting crazy so I pulled over and had the thing towed to the dealer. Now they tell me it's the transaxle that needs replacement for a cool $5k. Ouch!

I don't understand how they could have missed a $5k problem the first time around. And - could the problem have gotten worse (and more expensive) between the time they shut off the warning lights and sent me home the first time and the time that the car started acting funky?

I have read that the hybrid system is covered for 8 years/100,000 miles - does this repair qualify under the warranty? Is this warranty accurate? Wouldn't you know that I had bought a 2 year extended warranty when I bought the car used - and this warranty expired a month ago. The dealer doesn't seem to know what is covered under warranty and is currently "looking into it", and is obviously trying to sell me a new car in the meantime.

Any info that I can arm myself with before I talk to him next would be great. I think it's ridiculous that such an expensive component would fail after only 80k miles. When I bought the car used it had only 43k miles and appeared in great shape and I've taken good care of it since I bought it with regular oil changes and maintenance checks, etc. Since I bought the car, I have driven 99% on the highway and get, on average, above 45mpg so it's been a sweet little car for me - until now....

Help!