Here’s the video of Web 2.0 Summit host John Battelle interviewing Facebook CEO Mark Zuckerberg a few weeks ago, in which Battelle floated a rumor that the social-networking site might be interested in buying Twitter.

If you want to see the exchange, it starts at 22:15 minutes, when Battelle asks: “Is Twitter just a feature of Facebook?”

Awkwardness ensues from there until 23:07 minutes, with no direct question about an actual acquisition effort asked.

Thus, Zuckerberg does not have to fib in front of the Web 2.0 crowd about talks that were just then winding down between Twitter and Facebook, which offered $500 million in its stock to buy the popular microblogging site.

Actually, sources said, while Zuckerberg and Twitter Co-Founder and CEO Evan Williams did meet and get along well, the deal was primarily negotiated by Spark Capital partner Bijan Sabet (Spark is a Twitter investor) and Facebook deal guy Dan Rose.

But, in the end, as BoomTown reported earlier today in a detailed report on the failed deal, Twitter rejected that bid.

As is usually the case, the deal broke down over price–was $500 million worth of Facebook stock actually worth $500 million?–and the typical concerns about integration and costs. Also, Twitter wanted an all-cash deal.

But, more important was a feeling among Twitter investors and execs that the start-up should still take a shot at building its revenues–there are none right now–as well as it had done at building its growth.

In fact, Twitter’s fast growth in the “status update” arena has been a frustration to Facebook, some sources said, although Zuckerberg goes out of his way to compliment Twitter in the video below:

[Updated with new details about deal, including who worked on it and info on a cash component.]

About three weeks ago, Facebook and Twitter ended several weeks of serious talks, in which Facebook was offering to acquire Twitter for $500 million of its stock, which also included a cash component.

While rumors of Facebook’s interest were brought up in an interview with Facebook CEO Mark Zuckerberg at the Web 2.0 Summit a few weeks ago, some shot down the idea as silly.

Quite incorrectly, as it turns out, since top execs at both Facebook and Twitter were right then at the tail end of discussions, which were initiated by the privately held Facebook in mid-October, about bringing the two together.

Those talks, sources on both sides said, are now over.

So why did the deal break down?

Well, as is usually the case, over price–was $500 million worth of Facebook stock actually worth $500 million?–and the typical concerns about integration and costs.

But, more important, it seems, was a feeling among Twitter investors and execs that the start-up should still take a shot at building its revenues–there are none right now–as well as it had done at building its growth.

“It’s more about timing,” said one person familiar with Twitter’s motivations. “There is a strong feeling that there is still an opportunity–even with the economic downturn–to blow this thing out.”

Still, combining the world’s fastest-growing social-networking site with what is quickly becoming the best-known microblogging service is actually a natural fit.

That’s especially true given that Facebook–for all its powerful online social connections–has seen Twitter race past it in innovating in the “status update” arena.

While some sources at Facebook said Zuckerberg was becoming frustrated by the buzz Twitter was getting–a market that should have been dominated by Facebook–others at the company said he was interested in buying Twitter because of his respect for its progress.

Indeed, at the Web 2.0 interview, Zuckerberg called Twitter an “elegant model” and said that he was “really impressed by what they’ve done.”

Indeed, with about six million registrations, as reported in October, up 600 percent over the last year, the San Francisco-based Twitter–launched in 2006–has had impressive growth.

(It has also been plagued by technical issues, which are–to be fair–decreasing.)

In any case, for those not familiar with it, the premise of Twitter is dead simple: A registered user logs in via the Internet or a mobile phone and answers the “What are you doing?” question the service asks in only 140 characters or fewer.

It’s quite a clever idea, although–so far–not a money-making one.

To try to goose that, Twitter’s board replaced the engineer who created Twitter, Jack Dorsey, with another founder, Evan Williams, who had served as its chairman and chief product officer.

The more experienced Williams (pictured here) had already built one company–Pyra Labs, which created the Blogger blogging service–that he sold to Google in 2003. He also started the audio and video search site Odeo, where Twitter was actually born.

Still, its investors have not come down on Twitter to hold back its growth efforts, and have handed over $20 million to the start-up so far. In its last round, Twitter was valued at $98 million.

Its funders include: Union Square Ventures, Charles River Ventures, Digital Garage, Spark Capital and Bezos Expeditions, backed by Amazon Founder and CEO Jeff Bezos.

In addition, well-known Silicon Valley figures, such as Marc Andreessen and Ron Conway, have also invested. Interestingly, Andreessen is also on Facebook’s board.

Other private investors include FeedBurner Co-Founder (and now Googler) Dick Costolo, former Epinions Co-Founder Naval Ravikant and former Googler Chris Sacca.

Twitter needs all the investors it can get, since it has no revenue, although it has been exploring things like charging business customers and adding advertising into the consumer service.

Lack of revenues was an issue for Facebook, said sources, especially related to fees Twitter pays for delivery of its messages to cellphones.

While the issue has been manageable in the U.S., Twitter cut off its SMS support in some international markets this summer because of too-high costs.

But, if Twitter was offered to Facebook’s 120 million users, Facebook execs estimated that it might have to deal with huge SMS fees–up to $75 million annually.

“Facebook has its own revenue-generating challenges,” said one person close to the company. “As much as Twitter would give them a lift in the status area, it was still a worry.”

Not enough, said several sources, to stop Facebook from making another approach at some point in the future. “We’d hate to see Twitter go to another company,” said one source.

Indeed, while all are even more price-conscious than Facebook, large companies that could also be interested include: Google (GOOG), Yahoo (YHOO), Microsoft (MSFT) or a large telecom company, such as Verizon (VZ).

If it had completed the deal to buy Twitter, it would have been Facebook’s most significant acquisition by far.

Zuckerberg and Williams did meet and get along well, but the deal was primarily negotiated by Spark Capital partner Bijan Sabet (Spark is a Twitter investor) and Facebook deal guy Dan Rose.

But in this time, at least, the Twitter side was still not interested in selling at the price Facebook had offered.

The $500 million offered was in an all-stock form, said sources on both sides, at the $15 billion valuation that came from the Microsoft’s investment in the company last October.

The Twitter side felt that figure was inflated and the shares should be valued at the lower figures that have also been reported for Facebook’s true valuation, more in the $5 billion range.

That would have given the deal a $150 million price tag, which was seen as too low, especially since it was in Facebook stock and not cash initially.

In fact, Twitter wanted cash, which some sources say was offered by Facebook in the $50 to $100 million range, in addition to stock, but taking too much stock was still a major issue.

There are other ways the pair could have approximated a safer choice for Twitter, via warrants, of course, or other methods.

But, said several sources close to Twitter, the primary reason for not selling was because its board simply did not want to yet or perhaps ever.

Said one source: “The question is, is it really a good idea to sell on the first chance you get?”

Well, for Twitter, we’ll just have to wait and see about that, of course.

[Photo of Evan Williams by Joi Ito. Licensed under Creative Commons 2.0 By-Attribution license.]

Ah, the appeal of a fresh face is just irresistible to the press–OK, including BoomTown, except we posted more than a month ago!–with two major pieces, in Fortune and The Wall Street Journal, rolling out this week alone, with everything you wanted to know about the new COO of the social-networking site, former Google (GOOG) exec Sheryl Sandberg (pictured here).

But if you don’t have time to read them, here’s a quick synopsis of both:

Fortune: “Meet Facebook’s New Number Two” by Jessi Hempel

Details: Just 14 days into new job; Leg-tucking white Eames chair (pictured here); as Google’s VP global online sales and ops, ran everything!; she and Zuckerberg met cute at holiday party; aced Larry Summers’s midterm and final at Harvard public economics course, much to his shock, since he implies she was kind of chatty in class with friends.

Also Harvard MBA; obligatory McKinsey stint; Treasury Department in Clinton administration; picked 300-person Google over investment banking; always 10 steps ahead; Google.org mover and shaker.

Facebook aims: A need for corporate structure pronto; also time for the bigger picture; no more one-off decisions; more international growth; hiring senior managers; oh, yes, also must invent a new ad model for social networks.

But no silver bullets!; kicks ass, talks tough, then hugs all around (we did not make this up!); take out trash from Mark’s all-night Pizza-My-Heart-and-Red-Bull party (OK, we made that one up!).

Money quote: “This feels like Google when I started.“

The Wall Street Journal: “New Face at Facebook Hopes to Map Out a Road to Growth” by Carol Hymowitz

Details: Two weeks into new job; Biz dev guy Dan Rose is already sick of her (”It feels like she’s been here six months already.”); flip-flops endangered?; is able to argue why she is right by arguing how she is wrong; dangles data before engineers like fish before seals; easygoing but intense (when will these opposing dichotomies end?); crashed Harvard computers, but it was worth it.

Taught aerobics and was a stretching fascist; more cute dinner chatter with Zuckerberg before hiring; grew Google team from four to 4,000; a feminist and hangs with Gloria Steinem and Jane Fonda (see aerobics!) too!; Facebook pix of Argentine waterfall-leaning; went to high school in Miami; small kids, hubby; more 10 steps ahead and shoving people out of comfort zone.

Facebook aims: Employee performance reviews; processes for identifying and recruiting new employees; management-training programs; rally troops; stop the cash burn and up ad sales; close-knit culture must go, but you get hundreds of millions of new friends!

Also must figure out how to save Beacon’s bacon; earn trust of users, while frantically searching for a business model; wants frank feedback from staff and will publicly thank such person who gives it.

Money quote: “Facebook is a different space than Google, with tremendous potential to connect people, but it needs scale, it needs systems and processes to have impact, and I can do that.”