Is my hot water heater about to $%&* the bed?

Every water heater has an anode rod to protect the tank and heater element. The rod is chosen to last as long as the guarantee lasts. You can replace the rod at the end of the guarantee and it will be good for that much longer. If you let the rod get used up, the tank and heater get eaten away, which is what you have. This can only be fixed by replacing the entire unit. Make a note of the guarantee period on the new one and when it runs out, call the plumber to replace the anode rod.