Okay before hand I should say me and the player I describe were both neutral.

So, the story goes: a player named shadows attacked me outside of town; shortly after we both met in town. Apparently I was still attacking while in town, he died and his corpse remained in town.

So, with the new protected areas patch this should be impossible, correct? Or does the patch only effect those of good and evil, I'd appreciate a response.

You cannot innitiate an attack in a protected area period however, the game keeps an attack timed list, and you were still in the window of the attack time so you did not innitate the attack in town therefore it was legitimate. Had you attacked a good person outside of town and entered an area protected by good, you would had been jailed, same if you entered an evil area.

Since it was a Neutral character the guards stay out of the fight.