The wikipedia article on JW's and blood transfusion (found here:
http://en.wikipedia.org/wiki/Jehovah...sses_and_blood) provides a pretty good explanations.
The quick and dirty is that blood is sacred and can only be used outside the body to atone for sins, and then really only by Jesus's shedding of blood to atone for the sins of mankind. Abstaining from blood reflects the belief that Jesus's blood is the only blood that can or could ever "save" a person.