Improperly vented water heater...

I inspected a water heater today that had no draft hood? The exhaust vent appeared single walled, and was screwed tightly to the vent connector, then passed through the wall to the exterior. How can this be getting dilution air? Is this wrong? What am I looking at?

Thanks

Brandon, was it similar to this?
http://www.arrowheadlpgas.com/product.asp?Product_Id=20083&d_Id=5936&l1=5935&l2=5936

They make direct vent water heaters now.