Looks pretty rotten to me. You need to fix the moisture issue before anything else. Also probably a lead issue

Interior of window and trim were originally stained. Painted 5 or 7 years ago by previous owners. I think it is latex based paint. Definitely not a lead issue. I do think the windows were not prepped properly- probably painted only, with no primer base.

The previous owner may have used a water based paint, with no primer, over the stain. Once something has been stained you would probably need an oil based paint, unless there is a primer available nowadays that is able to bridge the two successfully.

If you have a trusted paint store, with knowledgeable staff, that is where I would start. I am sure there are good primers available that you can use prior to painting. Our local paint store suggested a primer called "Stix" for painting exterior doors, including new factory primed doors. It looks and sounds impressive, but I have not used it yet.

I would think a good sanding that removes all the old paint and any gloss followed by a proper primer will get your windows on their way to looking new again.

I used epoxy paint several years ago on unpainted wood windows. It was a product meant to paint boats and I applied it exactly as the manufacturer required. It peeled within a couple of years. Epoxy paints may have improved by now, but I've been burned by it and am not interested in repeating that experience.

Jeez...that looks like H&LL!

Do you get a lot of condensation in where that damage is?
Is this only occurring on the lower parts of sides?

Push something hard like a nail into the wood. You'll know right away if it's spongy.
Let us know.
And...can you post a couple clearer pics?

Faron