Lumber and Siding - Rotted Siding. Do I have termites? (Pics)

The siding on one side of my house is starting to deteriorate pretty badly, and since I'm planning on replacing my windows, I decided to pull up some of the casing to see just how bad the rot is. Below are some pics of the siding I pulled up. The last couple show the backside shot of one of the pieces of wood. As you can see, some kind of bug has been living in there (the wood is completely rotten and soft). The last pic shows some the insect skins, sacs, or whatever they are that were in the holes visible in the second to last picture. I dug around the wood a bit and the only thing I saw living was a very, very small centipede looking creature. My question is, does this damage look like it was caused by termites or just some benign bugs taking advantage of the moist environment? What type of wood should I use to replace that casing?

Lastly, I am going to replace the siding on that side of the house. Since I am planning on having insulated vinyl siding added to my entire house in a couple of years, I will simply be replacing the rotted siding with OSB board. Should I plan on replacing the foam board as well, or does that stuff not deteriorate?

https://www.msu.edu/~joshd/rot1.jpg
https://www.msu.edu/~joshd/rot2.jpg
https://www.msu.edu/~joshd/rot3.jpg
https://www.msu.edu/~joshd/rot4.jpg
https://www.msu.edu/~joshd/rot5.jpg

That looks like water rot to me, That type of siding of past bubbles and expands from water. It was probally not primed properlly when built and someone may have caulked weep holes on bottom of window which can cause that as well. Spray straight bleach on foam board to clean mildew off and you should be good to go. It looks from the photos to be a water not termite problem but a free termite inspection would never hurt:)

You definitely have critters of some sort! You are seeing them in the window trim, but they followed a path from the ground to get there, and they were eating wood along the way.

At the very least I would remove the siding around that window and have a pest control company spray the area. Then replace the siding and trim with new, along with any framing members in that wall that the bugs have seriously damaged.

Just read your last paragraph.

If you put up OSB siding to replace what's there, get it covered with vinyl NOW!! OSB won't tolerate water. It won't last 2 years if it's not covered.

The foam is fine to reuse. It's plastic -- can't rot and bugs won't eat it.

I've built some sheds and just used osb for the exterior walls. It can last IF primed and painted. You need to use an exterior oil base wood primer and a good coat or 2 of latex house paint. osb will last long term only if you keep on top of the painting - otherwise the little chips will start to fall off:eek:

True enough Marksr, but long before the little chips start falling off of the OSB, moisture and water will cause it to SWELL, and it won't do that evenly.

That would really create problems for mears down the line if he tried to attach a layer of insulation and then vinyl siding to the swollen OSB. The swollen OSB wouldn't hold the siding nails.

During the '70's I installed that siding type and they had a major recall of it. It is osb horizontal lap siding. I have it on my house and it too is failing, even with paint. The foil board may be your only shear panels on the house, as they were rated for such. Or, there are separate diagonal 1x4's let-in at the corners from top plate to bottom plate, nailed at each stud. If older, you have diagonal blocking let-in to the framing at the corners, 2x4"s. If you remove the foil, look for said bracing before removing all the foil board at once, as the walls could rack quite easily. The trim/siding joints at the sides of the window are letting water behind and down onto the bottom board, rotting, attracting bugs. The siding is failing and absorbing water as the picture of the mold under the boards nearest the window shows.
Read this on OSB before you install and leave it for any length of time: http://www.eima.com/pdfs/The%20Perfect%20Storm%20Over%20Stucco.pdf
Be safe, Gary