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With the Blue layer selected, Select the Move tool -V
Hold in Shift and drag the Blue half down just below the Red half to form a circle.
De-select the Blue half Ctrl-D.
One more thing, drag the Blue Layer below the Red Layer in the Layers pallet.
Now you should have four layers in the Layers pallet. Red, Blue, Base, Background.
See image.

We are finally ready to use the Pen tool.
Set the default colors by
Hit D then X on the keyboard.
Create a new Layer by hitting the new layer icon in the Layers pallet. Name it Curve.
Click on the pen tool from the tool bar.
Be sure the shape layers button is selected from the options bar.
Placing the drawing points are key here. Look at the grid. Count the main grid lines down from the top of the Red half circle. Go to the fourth gridline from the top down, then count down two smaller gridlines, so your curser is just a bit above the 3 inch mark on the ruler. Click the pen tool to make a point to the right of the Red half circle, as seen in the image.
See image.

Now we are going to draw a rectangle with six points. Starting from the point you just created, move the pen tool to the left of the original point to the center of the half circle. Put another point. Then move to the left of the center point and put another point all the way to the left of the half circle. The top of the rectangle is done, now move the curser down four grid lines and put a point below the top point. Proceed to put points across to the right to finish the rectangle shape. Be sure to connect the two points on the right side.
See image.

Now the magic begins.
Select the convert point tool. If you didn't select Snap to, back in the beginning of this tutorial, do it now. Click View> Snap. Shift-Ctrl-;
Now its time to click on the center point at top of the rectangle on the Curve layer. Drag the point 12 grid lines to the left and 3 grid lines down.
See image.

For the bottom curve. Grab the center point from the bottom of the rectangle and drag 12 grid lines to the right and up 3.
Now you should have a curve in the rectangle shaped like a side ways S.
See image.

Now that we are finished with the pen tool, its time to rasterize the curve shape.
Click on the Curve layer in the Layers pallet.
From the menu. Layer>Rasterize>Shape.
Lets use that layer to cut the Red and Blue layers.
Ctrl-left click on the Curve layer to put a selection around the curve shape.
Click the Red layer in the Layers pallet to select the layer.
Hit Backspace to delete part of the Red shape.
Click the Blue layer in the Layers pallet to select the layer .
Hit Backspace to delete part of the Blue shape.
You should now have the shapes cut with a nice curve in both of them.
See image.

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