I always have the same problem: I manage to capture 5 castles (and there are supposedly 7), but then the Demon Lord comes with a decent army, and Blue somehow gets Knights and Angels from somewhere!
Demons appear after capturing every other castle. The order of capturing castles is mentioned above in the thread.
To complete the game, try lowering the difficulty and/or not taking too long; completing this campaign 100% depends on being active at the beginning.