F#, 675 chars
let R()=System.Console.ReadLine().Split([|' '|])|>Array.map int
let B(a:int[][]) r c g=
let n=Array.init r (fun i->Array.copy a.[i])
for i in 1..r-2 do for j in 1..c-2 do
let e=a.[i].[j]-1
let e=if -1=e then g else e
if a.[i-1].[j]=e||a.[i+1].[j]=e||a.[i].[j-1]=e||a.[i].[j+1]=e then
n.[i].[j]<-e
n
let mutable n,r,c,k=0,0,0,0
while(n,r,c,k)<>(0,2,2,0)do
let i=R()
n<-i.[0]
r<-i.[1]+2
c<-i.[2]+2
k<-i.[3]
let mutable a=Array.init r (fun i->
if i=0||i=r-1 then Array.create c -2 else[|yield -2;yield!R();yield -2|])
for j in 1..k do a<-B a r c (n-1)
for i in 1..r-2 do
for j in 1..c-2 do
printf "%d" a.[i].[j]
printfn ""
Make the array big enough to put an extra border of "-2" around the outside - this way can look left/up/right/down without worrying about out-of-bounds exceptions.
B() is the battle function; it clones the array-of-arrays and computes the next layout. For each square, see if up/down/left/right is the guy who hates you (enemy 'e'), if so, he takes you over.
The main while loop just reads input, runs k iterations of battle, and prints output as per the spec.
Input:
3 4 4 3
0 1 2 0
1 0 2 0
0 1 2 0
0 1 2 2
4 2 3 4
1 0 3
2 1 2
0 0 0 0
Output:
2220
2101
2220
0200
103
212