Battery performance

[hsaadi10]

I have a Thinkpad X61s notebook with an 8 cell battery, that normally lasts for 4.5 hours with wifi and bright display.
Last month I noticed that once the battery reaches level 50% or 60% it drops automatically to 5% and hibernates. The battery is not lasting more than 1 hour now. The Lenovo Power Manager shows that battery condition is ‘good’. I tried to reset the battery using Lenovo Power Manager but the process took more than 2 days and did not complete. I forced it to stop.
I went to Power Manager and removed the alarms which hibernate the computer once it reaches low levels. The battery is now lasting much longer although it is showing 0% capacity. The problem is that the battery now goes into complete discharge and shuts down automatically without notice.
Attached is a snap shot of the battery status from the Power Manager.

I am trying to determine whether:
1) I have a bad battery and need replacement, or
2) I need to calibrate the battery and how to do that,
3) It is a software issue.

Your help is appreciated.