I finished the campaign on normal all round, and chapter 2 was annoying at worst.
2nd turn of the chapter, I took over red's capital. Green was overpowering yellow, so the rest of the fight was mostly me vs green. At one point green took the yellow capital (which I was bordering at that point), so I took it for myself the next turn.
So yeah... as people suggest, you probably want to restart the chapter, be brave, send in a good force to take red a.s.a.p. and then play the RTS battle well.
Because in RTS battles you can win with a 10% chance with a good dragon setup, good RTS play or WMDs.
