My husband and I just finished reading OotP. We decided that the only way to read it without a divorce resulting
was to read it aloud to each other... that's why it took so long.
I haven't read through this entire thread in detail yet, but I just have to say DAMN... this is NOT a book for kids!! I went into it knowing it would be dark, and knowing that someone would die, but even so...!!
As for the exams, I'm familiar with the British system, though I was not educated through it. As I understand it, O-levels are like high school proficiency exams in particular subjects (like the New York State Regents or other similar exams - not like SATs or ACTs, which are general proficiency exams) and A-levels are like AP exams. So O.W.L.s (O-levels) would demonstrate basic proficiency in various subjects that all wizarding-school graduates would be expected to have mastered, while N.E.W.T.s (A-levels) would cover specialized advanced studies.
As for Lily and Petunia's family, I believe they are/were all Muggles except for Lily. Petunia knows about the wizarding world because her sister was involved in it - Hermione's parents, who are Muggles, know about the wizarding world for the same reason.