Lily's and James' Parents

[Jennifer]

No: HPFGUIDX 84853

Lily's parents were muggles, so their deaths are hard to account
for in terms of VWI, but they loved Lily and were proud of her, and
Dumbledore would certainly have placed Harry in their keeping if they
were alive.

Jennifer:

    Do we know that Lily's parents were muggles?  In some discussions 
a few weeks ago, we were surmising the magical possiblities of Dudley 
and Petunia.  Some people believe that Lily is trying to squash the 
magic out of Dudley because Lily wouldn't be able to stand her own 
flesh and blood as a wizard, something she hates more than anything 
else.  But I believe that Petunia is a wizard, rather want-to-be-
wizard.  Personally, I think that Petunia is a squib and that her 
family was a modest wizarding family way back.  Petunia was jealous 
of her sister why?  Because she had the magic and was welcomed to 
Hogwarts.  Her parents were proud and happy because they only got a 
squib with her.  Her hatred of the wizarding world stems from the 
fact that Petunia was denied a great gift. 
     I base my theory on Dementors.  When the Dementor attacked 
Dudley, he could not see them because Muggles can not see Dementors.  
But Mrs. Figg could because she is a squib.  At the end of OoP we 
learned that Petunia is knowledgable of Dementors.  As a squib she 
would be able to see them and know of their horror.  If her family 
were muggles the Evans family would know nothing of any magic prior 
to Lily going off the school and I'm sure that Petunia severed all 
magical ties with her sister.  When they did see each other, I'm sure 
they were not discussing Dementors and blast ended screwts.  Thus 
Petunia would not have learned of them from Lily.  Petunia is a squib 
from a wizarding family not a muggle one.   Thus I believe that her 
family were wizards and still do hold some important mystery in their 
death.