Voldemort went to Godric's Hollow to kill baby Harry. James fought him -- in vain, but apparently well. Voldemort, realizing this to be a serious battle, used James' murder to cast the Horcrux spell, fixing his attention on some relic of Godric Gryffindor that was in the house. (Remember how JKR once said the name of Godric's Hollow was very significant?) He did this at the same time Lily was casting the protective charm on Harry. The protective charm did the one thing that would ensure Voldemort could not kill Harry: it made Harry the Horcrux instead. Harry could no more die than Voldemort, once Voldemort's soul was partly contained in him (as well as in six other beings/objects). Therefore the Avada Kedavra failed. The spell Voldemort cast scarred Harry and refracted back onto Voldemort himself (due to the soul transfer), which is what turned him into the Evil Gray Mr. Bill-like Thing of Books 1-4.
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