How to resolve siding leak (pictures)

We had a new roof installed on our house a month ago, There is leak around the dormer that has apparently going on for a long time. The trouble is the house was built in 1978, it is a cape cod and it has no eaves. Where the dormer meets the main roof there is a leak. The roofer said that the water is getting behind the siding (see pics) and to resolve it we should have the siding removed, housewrap the dormer, make sure the flashing is ok, put the siding back on, put gutters on dormer. I do not care what it takes to fix this since it is destroying the house (we have now had to totally gut a bathroom over this.)

My questions are this, If the siding is pulled off should we have the blackboard sheathing replaced with polystyrene sheathing? Is there anything else we can do or have done once the siding is pulled off? We are at a losshere, the roof is a 12-12 pitch so we will probably have the work done. My guess is more caulking is not the answer here.

Thanks
Flickr: civicminded33's Photostream

 

Well, I see several problems. First there should be a gap between the siding on the dormer and the roof. Most recommend a 2 inch gap. Then at the top of the dormer it looks as though the shingles have a dip in them. This would cause pooling of water which gives it time to find a way into the house.
I have some websites for you to go to see how it is recommended to be done. It does look like the siding will have to be removed to facilitate the repairs. As far as the housewrap and changing the blackboard that is up to you. You or the workers you hire should be able to waterproof what is there now with the proper flashings. You will understand more after you see the websites.
Roofing with Asphalt Shingles - Google Book Search

http://www.dryvit.com/fileshare/doc/...on/ds504_5.pdf

Weatherproofing Dormers - Fine Homebuilding Article

 

Well the roofer cam back out and determined that the crew did the flashing wrong. They used one long strip of metal for flashing which he said was wrong, plus the flashing had holes knocked in it when the roof was put on. He is going to come back and step flash it, and redo the flashing on the chimney.