Walking animals, like stick insects, cockroaches or ants, demonstrate a fascinating range of locomotive abilities and complex behaviors. The locomotive behaviors can consist of a variety of walking patterns along with adaptation that allow the animals to deal with changes in environmental conditions, like uneven terrains, gaps, obstacles etc. Biological study has revealed that such complex behaviors are a result of a combination of biome- chanics and neural mechanism thus representing the true nature of embodied interactions. While the biomechanics helps maintain flexibility and sustain a variety of movements, the neural mechanisms generate movements while making appropriate predictions crucial for achieving adaptation. Such predictions or planning ahead can be achieved by way of in- ternal models that are grounded in the overall behavior of the animal. Inspired by these findings, we present here, an artificial bio-inspired walking system which effectively com- bines biomechanics (in terms of the body and leg structures) with the underlying neural mechanisms. The neural mechanisms consist of 1) central pattern generator based control for generating basic rhythmic patterns and coordinated movements, 2) distributed (at each leg) recurrent neural network based adaptive forward models with efference copies as internal models for sensory predictions and instantaneous state estimations, and 3) searching and elevation control for adapting the movement of an individual leg to deal with different environmental conditions. Using simulations we show that this bio-inspired approach with adaptive internal models allows the walking robot to perform complex loco- motive behaviors as observed in insects, including walking on undulated terrains, crossing large gaps as well as climbing over high obstacles...