Petunia said her parents were so "proud to have a wizard in the family"...in fact, Petunia said that Lily practiced magic at home. If Lily and Petunia's parents were truly muggles, could Lily have practiced magic at home?
Assuming the parents were NOT muggles, they could have been squibs, making sense of why they were so proud of Lily for being a wizard. I feel, though, it's possible they were wizards and pretended to be muggles...it seems like a lot of secrets are hidden within that family...maybe Petunia knows those secrets...or maybe not...she says she's the only one that saw Lily for what she was ("a freak")...but maybe that suggests Petunia is a squib and was jealous of Lily being a wizard like their parents?
What do you think?
Better still, if their parents were wizards in disguise, why were they disguising that fact? And from whom?