When I view it in the device list it shows that it is using com7. But in the arduino software under the tools menu there is only com8 visible. Why? And if I try to monitor the com8 - it shows me nothing. Where did I go wrong?
I don't know, that is what I got also using windows XP and it's default bluetooth driver software. Only when I down loaded the Toshiba bluetooth driver stack did I then get a functional com40 port that worked with either the arduino IDE serial monitor or a serial terminal program (Brey terminal).
Also, the arduino TX lights aren't blinking. Should they blink or should they not?
No, the send and receive leds are driven by the USB serial convertor chip and are only active when there is a USB connection active. The 328 chip can still send and receive serial data from pins 0 and 1 as when you wire them to the BT modem module.
Lefty