Regarding the keys: Both halves of the key are with the dragons. 1) The first half is with the Bone Dragon (it's near a Castle; I don't remember what color the player's Castle was, but it's the easiest Castle to capture; search around it). 2) The second half is also with a dragon. Giovanni said that the second half is with a similar creature, and this key (I mean, the half of the key) is located near the Red player. Just gather a larger army and go into battle. Now, regarding the difficulty. In my opinion, you should start by playing the game on an easier difficulty level. Now, regarding the old woman who gives you the ability to make improvements in the Castle. I didn't go to this old woman at all. Of course, it's good to have the strongest units, but there's another way to improve your army. Near the weakest Castle, there's a Tower guarded by a Lich. Kill the Lich, and you can go and improve your soldiers.

Added 4 minutes later
Sorry, I forgot. I didn't write where you need to go after you find all the halves. You need to go to the Elemental Forge. They will forge the key for you, and then you need to go to the portal guarded by demons.