I am using ArcGIS 10. I made a layer mask (polygon) that blocks out everyting in a number of vector layers that is outside the area of interest (outside the boundary of two districts). I successfully applied the mask, however I note that the labels outside the districts of interest remain (i.e. the labels inside the mask area). Some of the labels are in an annotation feature class in a geodatabase. Some are not (i.e. I just have the lable features checkbox ticked). All labels are not masked. I have even tried switching it from the Maplex labelling engine to the standard engine, to no avail.
Try using Clip to Shape under Data Frame properties. I use that option when I want to clip feature by specifying area of interest. It also clips the label too.