I know, I spend a lot of time talking about Austin Kiddie Limits, but there are some pretty cool fests that, even though they don't have quite as much kids music, are still sufficiently kid-focused.
Seattle's annual Bumbershoot festival, which is being held this year, as always, on Labor Day weekend (Sept. 5-7), has kids bands playing for the first time. Luckily, Seattle's got a great crop of bands, so they can be local, too -- the Not-Its! play at 1:30 Saturday, Central Services’ Board of Education at 1:00 Sunday, and Recess Monkey 1:30 Monday.
You can't have a kids section at a music festival without having a cheeky name, and Bumbershoot is no different -- welcome to Youngershoot. In addition to the bands, they've got movies, animation, and all sorts of other cool stuff going on. They even take a crack at suggesting kid-friendly "adult" artists -- I've got a feeling there are some other folks who would second the Michael Franti & Spearhead suggestion...