The source of Dragons

[NightKnight]

I agree with PaleStar and Gurthang.

It is specifically said (Sil, I think) that Morgoth couldn't create life since his rebellion against Eru. (Yeah, Aulë created the dwarves, but they were given own life by Eru (something like "otherwise they would only be able to move when your thought was with them").)

Morgoth did take elves and twist them into orcs.

i'll give you a twisting of the elves, but raising an army takes time...not just like a snap of fingers

Who said he didn't have time? I think the first appearance of orcs were at the time of the first battle in the Beleriand Wars, which he won (didn't lose all his armies). He had had thousands of years to raise an army. After Dagor-nuin-Giliath (loss), he had 75 years until the next big battle, Dagor Aglareb, to breed a new army. And I think anyone would try to do anything with Morgoth's whip over your head.
Then it took almost 400 years until they came out in great numbers again. The Earth's population has grown with billions in that time. So I don't think that was a problem.

Balrogs were another thing. They were fallen maia, who served Morgoth more or less willingly, stuck in those big, fiery bodies. He might have created their bodies, but not their souls.

Now, the big problem. Where the heck did the Fell Beasts come from? I think that they were either Sauron's attempt of making dragons, like Gurthang said, or some failed creation of Morgoth, perhaps a first sketch of the winged dragons, maybe thrown out of Angband and taken over by Sauron. A third possibility is that they were already existant, maybe in the far south/east and found and bred by Sauron as a cool feature for the Nazgûl.