My favorite festivals are:
Thomas Point Bluegrass on labor day weekend, Brunswick, ME
Grey Fox Bluegrass in July (formerly Winterhawk), Ancramdale, NY
Strawberry Park Bluegrass in June (next weekend), Preston, CT

There's a really good guide to festivals around the country at the Dirty Linen Festivals and Events List at:
http://www.dirtynelson.com/linen/special/events.html

There have also been several interesting previous threads on favorite festivals, which you can find by doing a search on the forum on the word festival.