Shuttles undergo an Orbiter Major Modification period about once every ten years or so. They essentially disassemble the entire spacecraft and put it back together, which ususally takes about two years. Endeavor is going through one right now (since December 2003 to be exact) and isn't ready to go yet, which is why NASA has to keep flying two shuttles.
Atlantis is (was) scheduled to undergo this modification this year. Instead of spending the dough to do it, they will just save money by retiring it now. Discovery has obviously been through hers already.
And you are exactly right, NASA does want to keep it a bunch of work. That's the only way to ensure that the thousands of people who are involved with STS stay employed. If they weren't, NASA would not require as much funding, hence, budgets tend to decrease. It's a vicious cycle...