In game 1692802, I can't kill neutral territories. I win the dice roll, and the game log displays that i conquered the territory, but it remains neutral and i can attack it again. I don't have an option to advance troops either. Here is a bit of game log...
2008-01-29 21:07:56 - alan.duanmu gets bonus of 5 armies added to Rebel Territory Castle
2008-01-29 21:07:56 - alan.duanmu receives 1 armies for holding 2 Rebel Territory Territories
2008-01-29 21:07:56 - alan.duanmu receives 3 armies for 3 territories
2008-01-29 21:07:58 - lama gets a card
2008-01-29 21:08:03 - alan.duanmu deployed 4 armies on Rebel Territory Castle
2008-01-29 21:08:07 - alan.duanmu bombarded Rebel Territory 3 from Rebel Territory Castle and annihilated neutral player's armies
2008-01-29 21:08:09 - alan.duanmu bombarded Rebel Territory 3 from Rebel Territory Castle and annihilated neutral player's armies
2008-01-29 21:08:10 - alan.duanmu bombarded Rebel Territory 3 from Rebel Territory Castle and annihilated neutral player's armies
2008-01-29 21:08:11 - alan.duanmu bombarded Rebel Territory 3 from Rebel Territory Castle and annihilated neutral player's armies
2008-01-29 21:08:13 - alan.duanmu bombarded Rebel Territory 3 from Rebel Territory Castle and annihilated neutral player's armies
2008-01-29 21:08:15 - alan.duanmu bombarded Rebel Territory 3 from Rebel Territory Castle and annihilated neutral player's armies
2008-01-29 21:08:43 - alan.duanmu gets a card
Also, the neutral territories can be attacked until they are down to 1, but they stay there.