A couple of ways to get around this. One way is to add an alpha channel to the diffuse texture in PS (file34). Then you can connect the outtransparency of the diffuse texture node to the transparency of the blinn. Another way when using a straight mask texture (file35) is to connect the outcolor of the mask to the transparency of the blinn. Just remember white is transparent, black is not. You can invert the mask texture in PS, or select the invert option under the "Effects" tab of the file node in the attribute editor or can you can add a reverse node between the file and the blinn.
You will also have to mask the specular reflections or else you will get unwanted highlights from the transparent sections.
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