jayberz - Couldn't have put it better myself! Layer masks are the way forward for any sort of cutout work in Photoshop as it is non-destructive, you can just brush white (or any level of grey) on your layer mask and reveal the layer again... sold gold!
Gradients come in very useful to create a smooth blend on layer masks, it is often best to use a black or white into transparent gradient.
Also remember, Layer Masks are just greyscale images defining the layers transparency, so you can filter it too! You can create some very cool creative edges using filters like halftone and the artistic ones. Also a poor cutout can be disguised by apply Gausian Blur to soften the edges of the cutout. Maximum and minimum on fairly low settings are good ways to choke or exand a layer mask too.