He's right, you gotta level up. I was lvl60ish i think when i beat KH. You don't HAVE to be lvl80 to beat Sephiroth though, i did it at level 72. I've killed everything in the game now, and I'm level 79.
If you go back to the Library in Hollow Bastiona nd talk to Aeris she will give you more Ansem Reports AND upgrade you to Curaga. Not sure if you've doen this, but it helps.
The big keyhole in Hollow Bastion is THE keyhole thre, the one you lock, after fighting Riku.
I locked the Rose weapon, I prefer it to Oblivion. I defeated Sephy using the Rose. It's pretty powerful. (I think it was the Rose anyway, either that or the Oathkeeper)
Hint for the sword guy in Agrabah: Equip dodge Roll. When he is hurling himself at you, run towards a dip in the dunes and Roll into the dip, it worked for me 90% of the time.