This thread actually contains some pretty good stuff. Well worth bumping, IMHO.
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As to how Morgoth came to create Dragons, this is, as some have already said, a matter of pure speculation. My own theory is that they originated from large reptilian beasts which originally inhabited Arda (similar to dinosuars). Morgoth imbued these beats with disembodied spirits (Elves, or possibly Maia), thus giving them awareness and intelligence, and proceeded to breed them for certain characteristics (resulting, ultimately, in the winged variety).
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Yet
again 
I agree with
Saucepan Man, and also with
Lost One, who pointed out that:
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In one of the versions of Turin's story, I think it say something like 'the evil spirit that was within (Glaurung) spoke..'.
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Glaurung is several times credited with doing something "by virtue of the evil spirit that was in him". Perhaps Morgoth used these large reptilian dealies as bodies for some of the most powerful evil spirits in his service. We are told of several incarnate Eälar (spirits such as the Maiar and Valar) in the service of the Dark Lord: Sauron (who returns again and again in new forms), the Balrogs, Ungoliant (although she was never truly in his service). So I am firmly convinced that the evil spirit in Glaurung was of the same origin as Sauron and the Balrogs. My question is, what was that spirit doing before becoming incarnate as Glaurung? And what happened to it after his death?
My first reaction would be to say that the spirit of a former Balrog inhabited Glaurung, since they were the most powerful and evil of Morgoth's forces next to Sauron. But I don't recall any mention of a Balrog being slain until the Fall of Gondolin. So I assume that a spirit that had been lingering around Angband, or possibly cruising around Beleriand going "woo! wooooo!!", without a body, was called up for active duty, plonked into ye olde beast monster, enhanced with Morgoth's power over fire (dude was equivalent to a Vala... hello!) and let loose.
Now, what happened after the death of Glaurung? Well, what happens when an Eäla dies? Sauron died three times and returned (Tol-in-Gaurhoth, Númenor, Siege of Barad-Dûr), until finally he perished with the destruction of the One Ring. Much of his power was manifested physically in the Ring, and so he was finished when it was melted, yes Preciouss. Saruman was incarnate as an Istar when he was sent to Middle Earth. When he was killed, his spirit had no house; being evil he was banished from returning into the West, so he was finished as well. Gandalf would have suffered a similar fate, except for the intervention of Ilúvatar himself. So it is clear that once they are definitely incarnate, an Eäla will be killed if their body is destroyed. The spirit residing in Glaurung must have perished after he was slain by Túrin.
Could dragons breed? If not, then they would all have had to be created by Morgoth in the First Age. In
The Hobbit, Smaug the Magnificent says that he was a young dragon when he first came to Erebor. In the relatively short time that he resided there, he had become older, with harder armour. If Smaug had been created by Morgoth, he would already have been ancient when he took over the running of the Lonely Mountain, and a few hundred years would have made little difference to him. Dragons bred. Which would mean they are a case similar to the Eagles. We know that most of them are mortal, but we aren't too sure about the fathers of the species, which would be Glaurung and Ancalagon.
Were Glaurung and Ancalagon Maiar?