Fossils where found in every epoch. There are even records, dating from the classical antiquity, explaining how to use them for creating drugs. So I think yes, they found some dinosaur stuff, that needed explanation. On the other hand, Asian dragons are much more similar to snakes and common reptiles, which in conjunction with the fact that early religions and mythology very often mix several animals into the appearance of one deity, these dragons could be simple religious projections, which are very common in the evolution of religions from animism to monotheism (Egypt, North and South-American Indians, etc.).
... and I'm in for The Legend of Kyrandia. A classic point-and-click, my favorite good old games!