Stretch, thanks so much for your reply. I gave you 5 stars for your
post and thanks again for your help! :-)

Thanks for reminding me that I should NOT use putty or silicone, I
almost did that until I read the site I posted
(http://www.factsfacts.com/MyHomeRepa...sureRelief.htm). I don't
think this is a DIY project so we will be hiring a professional to take
a look at the problem, by the way, could you maybe explain a little bit
more (if you have time) about the pipe dope and/or teflon tape ?? I
don't know anything about these two materials (in terms of fixing the
threaded connection). As we just purchased this water heater like 2-3
years ago, so I don't think the tank is leaking.. so it could be #2
(Leak is at threaded connection).. I will post back after the
profesional take a look..

Thanks again for everyone's help, I really appreciate that!