Sorry, if these questions are very novice. I actually did seed the area in spring 2011, but much smaller patches, and seems like what is ever eating at roots went through what was reseeded in matter of just a couple months. We were watering pretty much daily, but I'm now thinking watering (in back) was only adding to the problem. Our front yard looks great, and compared to neighbors is one of better looking lawn areas. Our back lawn is fortunately hidden but is embarrassing. Any help to get back to nice looking, rich growing lawn will be appreciated.

The soil should have some substance--we call that organic...or natural. Fertilizer is nice, as long as it feeds the seed and the lawn. Too much water, is as bad as too little. Same goes for fertilizer; the wrong kind at the wrong time can disappoint the grower.

The ground must drain well. That speaks too about where it drains....away from the house. Ground that is hard and compact...usually, without going to extreme, is caused by walking on it in an always pattern that causes a path to show. Heavy machinery--such as a tractor or driving Old Betsy across it, can cause misery for seed.
If you feel your lawn is not compact, then you may decide to roll the seed with a roller. Usually fill the roller only one-third full so it can be handled safely and puts the seed into good contact with the soil without compaction.

So the soil should be able to absorb, yet drain well.
Having that, we then introduce some good soil...if the ground has been growing grass well enough, then we add a minor amount..top the ground in other words with about 1/2"
to 1" of good topsoil/compost/triple mix..you choose..every spring, every fall to build the goodness.
We then choose the best seed we can afford in the type that is best for your zone. In northern climes it is usually to seed with a combo of 40% Kentucky Blue, 40% perennial ryegrass and 20% fescue. This makes for a tough, drought proof, sun-proof, shade proof lawn that gives good results in all seasons, even winter.

Whether you fertilize in spring or in fall is up to you.
Winter can do a number on a lawn. If it hasn't sufficient moisture from snow melt and spring rains, then it will dry out. Dryness causes short roots which, when the sun hits it, dries it out more. So adequate spring water is necessary to get the lawn started off good.
But, with spring rains, too much rain is as bad as too little. Drowning a lawn can cause short roots, which dries out the first time a hot sun hits it.
This is a direct cause of why persons living on a flood plain have so much problem growing a lawn.
Too much, all too quickly, then too hot and too dry.

If you feel that the back lawn is really dry, really compact, then you might feel it needs aeration. That can be fixed by going over the lawn with a machine that pulls plugs--you best read about aeration before attempting this kind of fix.
Generally, all a lawn needs is care....at the right time.
Watering, fertilizing, mowing at the correct height and overseeding annually can help a lawn stay ahead of problems. Sometimes lawns as affected by bugs...but if the bug problem is not too much, then trying to overcome them might be a waste of time. Let the bug have a bite or two--unless the problem is severe enough to warrant trying to rid the lawn of it.
It helps a lawn stay high enough to shade weeds. Mow at the height of 2 1/2" - 3"...and not go lower, can put the clippings back onto the lawn to use the nitrogen that is in it. It also will shade those weed seeds that always pop up. Again, removal of weeds by digging them out manually and staying ahead of them so they don't get a headstart and become a problem. Herbicides are best sprayed on the weed, not the lawn. Most broadleafed weed killers are safe to use on natural grass but do read the label if used.

About that browning in a section. I would suggest you not think all manner of bug invasion is the cause. Sometimes it is a bug that has just moved on and the lawn will recover on its own given sufficient moisture and maybe some fertilizer to give it impetus to grow new grass.
Fertilizer containing high amounts of nitrogen can often cause grass to fill in bare spots. A balanced bag of food containing the 3 elements...nitrogen (N), phosphurus (P) and potash (potassium) (K) will give a lawn what it needs.
Feeding the lawn at the appropriate times will keep a lawn in good shape all season long.

This was quite lengthy I know...I feel sometimes its best to give the whole story instead of trying to help in a serialized way.

No. Don't add soil unless your soil level is low.

"2 - is reseeding as good as new sod? I do wish to note that seeding seems to make more sense because there are patches of grass being kept in, while about half of entire yard (in spots) is gone"

Sod and seed can both get you where you want to be. Good sod will be better than bad seed and good seed will be better than bad sod. Sod is faster, but far more expensive.

"3 - what suggestion for reseeding do you suggest? If you could walk me through process of bare ground to fully grown grass, I'd appreciate this."

Where in Wisconsin are you? It may e too late for anything but a dormant seeding this year.

"4 - how will the next year (or two) look in terms of this project? My hope is to be 'good to go' by spring 2012, but I realize it could be 2 to 3 years to get back to fully green, wonderful lawn. I dunno, and is why I ask. "

There are too many variables to answer this with any accuracy.

Thus an example. Back yard depth 50 ft X width 30 ft...
= 1500 square feet. Multiplied by 1/2" soil = 750
Multiply by 3 = 2250 divided by 1000...move the decimal...= 2.25 cubic yards.
This is a lot of soil but not a great deal...it could be bought in bags or brought to your driveway by truck.
Usually bagged soil costs more than buying in bulk but you can price the soil before purchase. You need not buy expensive stuff...topsoil comes in many forms and true, you can buy more clay which wont do a thing for your ground but it can be a start for overseeding, then buy the good stuff when your lawn gets going well.
Look around the neighborhood for construction sites...ask if you can remove some of the soil they mound up. Usually its from down deep, might even have some goodness in it and the price is right too.....free.