On my old F it was similar - I cut it ALL out - as far back as good metal (this is important) - I also found a car in a scapyard that had REALLY good sill ends and got the yard to cut them off for me....
I then cleaned them up, rust proffed the insides of the new part and the old sill area, cut it to shape etc as close as I could, then got someone to weld them in. Almost indestinguishable it was too...
Just make sure that it is rust proffed inside with something, and that all teh sill drains are open - If you have a jetwasher get it inside while you have a big hole and let it flush all the crap oyt, then this warm wetaher can dry it out if you leave the hole uncovered while the sun is out.
DONT PANIC though - its about the only bad common rust area and is caused by a combination of blocked drain plugs, mud and water, and constant battering from road grit.