" what is the dry cracking dusty stuff "

That is the window falling apart. It is dry rotting. Is it soft?

Its isnt soft. i thought thry were rotting too but i had a contractor come and said he thought we could just fix them up.

so i tried touching it and under the dusty surface the wood is still hard.

It is dry rot, you can fix it. You "may" want to try a wood hardener before refinishing just to help stabilize it some. The problem with refinishing is the areas where the profile is gone will always look exactly like that, that the profile is gone.

Do i scrape off the dusty stuff? or sand it? are there certain tools im supposed to use?

You will also need to replace the cords because they have a lot of fray on them.

I would sand it off, even though you say it is not saft, scraping may do more damage than good. Sand just until the loose stuff is all gone, clean, lightly sand and clean again. Get tack clothes as well.

Personally I would use an oil base primer as well.

Those don’t look like they are painted. They look like it is varnished.

Can’t someone give advice on refinishing them without primer and paint?

This is an old house with beautiful millwork that hasn’t been desecrated with paint. Don’t start now.

" or should just fins a vlose paint color? "

It is a weather, beat up stain finish. I do not think you will get the sash clean enough to make a stain look decent. The OP asked about a paint color so I suggested the primer.

Looks like failing polyurethane. Start with one window and sand all the failing areas with 150 grit paper and then apply one coat satin oil poly. See if that looks better and blends well.

Old windows have a glazing compound made from linseed that holds the panes into the frame. Over decades, this dries out and chips or flakes off. You want to replace it before you paint. The stuff isn't that expensive and This Old House has videos telling you how to apply it.

Yes but glazing compound is on the outside, only wood is exposed on the interior.