Long story short – the previous owner hired a crackhead to pave over the dirt driveway. The guy ended up raising the grade beyond the basement window sills on one corner of the house, and here's what it looks like now: 
The bottom casings, and sills appear to be completely rotted out at this point:
Rot #1: 
Rot #2: 
Rot #3: 
The basement is finished, and there does not appear to be any water damage inside… yet. I would certainly like to keep it that way.
From inside #1: 
From inside #2: 
Obviously the first issue that needs to be addressed is drainage around the windows – I have a pretty good plan in place for this which I will be posting separately for critique. What I'm looking for is the best way to replace just the sills without tearing out the whole window.
This is what I was thinking to do:
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Cutting the sill on the inside, flush with the window using a toe kick saw / osciliating tool.
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Dig/cut/remove any trace of the cut off sill piece from outside.
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Rip a 2*2? (not sure the windows frame thickness) and liquid nail it into place.
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Attach new casing.
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Caulk inside and out.
-Is this the correct approach?
-What about flashing – what is the correct way to use flashing and which flashing to use in this situation?
-Should the replacement sill piece be from pressure treated wood?
Best Answer
Think about replacing the sill and the casing with some of the PVC or composition boards that are available in the home stores. Any wood you put down there will be rotten again in 5 years.