From the pictures, it looks like are are problems with the grading. Without topographic information and a comprehensive understanding of the site grading (where the problem spots are and how the water can be made to leave them) it's not possible to suggest how to fix the problem. The best thing would be to involve a local professional who understands grading.

red circle below indicates the area where the siding has begun to rot (no more grey paint) --------- because mulch is too close to it. as a result i suspect carpenter ants have been entering into crawl space.

problem here is the siding is in a zigzag pattern with the concrete is right below it. i have marked where the concrete face are. all sidings are the horizontal planks you see

in terms of topography, the low spot and high spot is now marked clearly

i do not want to make the low spot any lower, but at the same time, the siding there extends way lower than the adjacent concrete wall. which means i need to remove mulch to get it away from the bottomost siding at the low spot area. however, if the mulch remains the same or slightly lower next to it, water will still flow to low spot.

this is why my dilemma exist. how do i resolve this problem?

[other sides of the home seems fine so far. i only need to shovel the mulch away. the problematic side of the home is the one pictured below

You're showing the problem. But the solution (lowering the grade) lies outside of the area shown in the photo. You must reduce the grade so that it slopes AWAY from the wall. The yard will be carrying water to somewhere else that does not show in the photo.

Do you mean I have to bulldoze and uproot my entire grass patch area ? That is what I am trying to avoid doing now if possible -- is there any solution to making the regrading work without tearing up the grass ?

One option to find the correct grade away from the house for the mulch would be to stake the high and low points, and tie a sting between them a few inches above the siding edge, use that line to determine a set distance below the twine to measure down to. To slope away from the house you can place a second row out several feet into the yard to determine how low it needs to be. But as previous poster said, this only moves water to the yard, if your grass or hill slopes towards the house then grading the mulch won't help that.

If water against your foundation is a big concern, you could think about pulling all the mulch away 1-2' and laying in a geotextile and gravel/river rock to aid drainage. In addition, pulling your downspouts out of your weeper and extending the downspout into the yard 8-10' could help. (As long as the slope drains away from your house)

I am not a professional, but my concern would be that the overall grade of the yard leads to a bowl shape with the low point under that porch. Is the area you took the last photo from higher or lower than under the porch?

i have uploaded the complete set of photos describing the problem http://www.slideshare.net/mishyq/regrading

@ Thom : the last picture was taken from higher than under the porch

i have to clarify --- the problem is i cannot really lower the grassy patch. the grassy patch is at the same elevation as the neighbor's property (behind the wood fence). If i lower it. i will probably start receiving a gush of water flowing into my home's surrounding --- creating a bigger problem. Should I create a swale instead - is that any good for me?

Also, the rule is mulch/top soil must be 6 inches below the bottomost wood siding, correct? if yes, this is another problem for me because that's not happening now and i dont know how to make it happen (when you see my backyard you will know why)

the lowest point in my home, i believe, is at the NW corner of the property (see my slideshare link below and you would know what i mean)

i think as long as the water flow not anyway near to the siding/concrete, i am okay. I know that's not 100% perfect solution, but it will be better than what's happening now. this issue is somewhat important as i live in Seattle area (and we receive lots of rain as you probably know). I am consulting professionals this week, but at the same time i like to hear opinions from kind souls here so that i know what i am facing here (and not be subject to any rip-off from contractors)

Ah, that clears it up a bit, I'm in western New York, so we get heavy snow melt run off, but not the rain you are used to. But my opinion would be that since the rain is flowing towards the low spot in the mulched area in the back corner, you'd be best served by working with the slope you have already, and just guide towards that spot. On site contractors would probably be your best bet, I'm sure there's an angle I'm not seeing to this.