Swollen/pregnant battery on a MacBook (13" aluminium late-2008)
I run into this as well with our MacBooks after a few years. You have to replace the battery. If you have an Apple Store or Reseller nearby, ask whether there is a replacement program ongoing (there sometimes is) which would allow you to get a new battery cheaper or for free.

It would be odd to have a 2008 model Mac still covered under a one year warranty. Even AppleCare with a three year coverage would normally be expired in this case. You might need to spend $129 for a battery at this point, but you could try one more time at a store if you read up on some details.


http://www.apple.com/batteries/replacements.html


Towards the bottom it says:


  However, the AppleCare Protection Plan for notebook computers does not
  cover batteries that have failed or are exhibiting diminished capacity
  except when the failure or diminished capacity is the result of a
  manufacturing defect.


Then you'll want to go to the full AppleCare document, http://www.apple.com/legal/applecare/appgeos.html, where if you search for battery and skip past the iPod parts, will be:


  
  What is not Covered?
  4.1 Hardware Service. The Plan does not apply to:
  (vi) Consumable parts, such as batteries, except in respect of battery coverage under APP for iPod or unless failure has occurred due to a defect in materials and workmanship;
  


So, with a battery that is rated at 300 cycles, and is listed as a consumable part (i.e. expected to fail over time), it's pretty common for some people with failed batteries to have to pay for a replacement. Now, the one thing would be if the trackpad still doesn't work after you paid for a battery exchange, I would ask them to consider repairing that.

Keep in mind - the warranty (or care plan) has a start and end date. During the time of the plan, it's Apple's responsibility to pay for repairs and service and parts for covered repairs. After that time, it's the consumer's responsibility to pay.

I would head to the genius bar, with an appointment, and ask them to look it over. Explain (briefly) that you were told at another store you had to pay for a battery and feel bad. You clearly wish it had lasted longer and ask if there is any way they could help you avoid paying for either a repair of the trackpad or a replacement of the battery. 

Think of that person as your friend as opposed to someone "working for the man" and is there to say no. You might still get a no answer, but at least you read up and can talk with them over what would be covered and what wouldn't be covered. By trying to get a second hearing of your situation, you might either feel better or they might find a way to help and you'll be out a trip to the store and maybe the cost of a battery.