Just 3 ft. tall, they dwelled in caves and darted through tropical foliage, using their long arms to pull themselves into trees, away from the fearsome, carnivorous dragons that stalked the jungle floor.

Characters in the next The Lord of the Rings sequel? Nope, they're Homo floresiensis, a unique species of humans that lived as recently as 12,000 years ago on the Indonesian island of Flores, east of Bali. The discovery of their remains in a remote cave by a team of Australian and Indonesian researchers has sent tremors through the science world because they probably represent a completely separate branch of the human evolutionary tree, never even considered before. And, because the creatures—called Hobbits by the media—lived so recently, they would have shared the region with people like us. Until now, scientists thought only Neanderthals and Homo erectus, who died out 30,000 years ago, had walked the Earth with Homo sapiens. "It's a tremendously exciting find," says UCLA anthropologist Gail Kennedy. "And a total surprise."

The discovery almost didn't happen. A 1989 dig by Indonesian researchers was abandoned when the money ran out. They returned in 2001 as part of a joint excavation with an Australian group. But after finding only ancient tools and remains of modern man, the Australians went home in 2003. The Indonesians were 10 days away from giving up when they came across a tiny mud-covered skeleton 17 feet down. "We thought we had found a young child," says Thomas Sutikna, 40, a researcher at Jakarta's Indonesian Centre of Archaeology. "Then we realized it was something more."

The adult female was the size of a 3-year-old, with a brain even smaller than a chimp's. But stone tools found in the cave indicate a surprising degree of sophistication, says Australian Peter Brown, who was on the team. A volcano eruption 12,000 years ago seems to have wiped out the species. Though local folktales have for centuries told of tiny people inhabiting the island's forests, Brown says the possibility that Hobbits still survive is pure fantasy. "But imagination," he adds, "is a wonderful thing."