Short Answer:
Blisters that fill with fluid, break and turn into lesions.
Long Answer:
The first signs of a cold sore forming, is the appearance of several fluid filled blisters. Usually these blisters are very small and they usually form in a cluster that is no larger than about the size of a nickel. In some cases individual blisters merge with others so to form a single larger blister.
Cold sore blisters will rupture soon after they have formed, resulting in a shallow reddish ulceration whose surface becomes gray. This ulcerative phase of cold sore formation and can be its most painful stage. This is also the stage during which a cold sore is most contagious. In some facial areas the ulcer will become dry and scab over. This scabbing formation is often accompanied by an itching or burning sensation. The scab itself will often crack or break, which in turn can cause bleeding.