http://www.washingtonpost.com/wp-srv/special/politics/prism-...
http://gizmodo.com/confirmed-nsa-paid-google-microsoft-other...
They are lying through their teeth. As you should know skj, being a google employee.
There's been a bit of a wandering definition for PRISM, from "they have NSA software with root access to all machines!" to "they receive LEO requests for information, which they review, and sometimes fulfill." The former is untrue, and the latter is true.
Though, as Google and Yahoo later found out, the NSA was directly tapping cables between their data centers [1].
[1] http://www.wired.com/2013/10/nsa-hacked-yahoo-google-cables/
1) True.
2) Consistent with statements made by Google.
3) Quickly mitigated by Google when it began encrypting traffic between data centers.
What has happened here is google has got scared. Because without trusting users all their business models fall apart. So they are lying. Its that simple.
Which is why it could never happen without it being well known inside Google.