Setlik III is never actually said to be one of the disputed territories, or to have been folded into the neutral zone. In fact there is some evidence that it never was: Setlik III was a relatively small outpost which the Cardassians wrongly believed to be the staging point for an invasion force, and which was in practice both full of civilians and inadequately defended. Staging for a surprise invasion within a disputed area during a hot war (where enemy attacks and accidental discovery both are much more likely) would have been an odd choice, as would neglecting the defense of that world. Further, no reference is made to the Cardassians attempting to reclaim it as a world they felt they should rightfully have owned, and Glinn Daro describes the attack as “a terrible mistake.”

I think the implication here was and is that the Cardassians had snuck pretty deep into Federation territory, attacking an outpost which was thought far enough back to be safe but which could reasonably have been a staging ground for a large Federation fleet.