Well, since I recently received Paint Shop Pro 8, I will tell you.
Image --> Palette --> Set Palette Transparency
Once the menu comes up click:
"Set the transparency value to palette entry" Leave It on zero.
Then click the color box, and change (in this case) your color to the blue which you want to set as transparent. Click Ok once you have done so.
The color may not show as transparent but, it is. You can always go back to:
Image --> Palette --> View Palette Transparency
There you can see that it has been set.
