I am ready to wire up the 5 way switch on my IB-1 kit. The wiring diagram shows 8 connections and the one I have has only 7. Is this a problem or can I wire it now?
The 'looped' blue wire that's linking the two solder points in this diagram is because that switch has a separate 'common' for each side of the switch, and they need to be linked. Your switch, from the image you posted, has a single 'common' rather than two so you just connect the blue wire in the diagram to that single point.
Make sense?
And, as Gav says, make sure you connect a ground wire from the back of a pot to one on the tabs on the metal body of the switch, just to ensure it's grounded too.
No, it's not shown on that diagram. Just connect a wire from the back of the volume pot casing to one of the metal tabs on the switch body. It's just a safeguard.