Thses creatures are made by Mahalath one of the two sisters you must take side in the quest Sibling Rivalry. They are found in the Forlorn Cave and they are friendly.You find out that they are made in an effort to create the best army the world has ever seen to fight for Laiken capable of defeating the Black Ring and even Damian.
She is in a competition with her sister, Adah who claims her Dragon Elves are better and she deserves Laiken's attention.The first time you meet the sisters there is a fight between a Dragon Elf and a Walking Armor.The latter wins the fight thus showing that the Walking Armors are better than the Dragon Elves. However her sister is not content with the result so she wants to sabotage Mahalath's Forge using fake red ore.
The Walking Armor's power comes from the Red Ore found in various veins and by using fake red ore they will lose their powers.