1. Get the domain a long way out from the event, and plan to keep it. If the next festival is next July, go ahead and register the domain now to avoid possible sandbox effects.

2. Since you don't have much to say (yet) about next July's festival, make the content a recap of what went on in this July's festival. Be thinking about the content and nav you'll want next year. So, for example, if a big part of the festival involves arts and crafts, you can talk about the types of exhibitors you had this year (perhaps a list, show pictures, etc.). Same thing for the road race, entertainment, sponsors, food court, schedule of events -- whatever the big things are for your festival. Don't forget about a page highlighting what will happen next year. This could be on your home page.

3. After you get the site up and running, think about getting links from DMOZ, the local Chamber of Commerce or Visitors Bureau, business associations in the area, local community sites, or similar. These shouldn't be too hard to get.

4. As you get details on the upcoming event, post the new information.

5. 2 or 3 months out from the event, think about sending a press release or advisory to local newspapers and many of the same sites used in 3 encouraging people to register early for the road race, arts and crafts, parade, or whatever you have that might need pre-registration. Make sure you have a sign-up form on the website for people to link to, or even better a link on your home page for the registration form.

6. 1 month out: hopefully by this time, someone typing in your event's name into a search engine will see it as #1. Send out another press release/advisory with the event schedule to draw a few new links.

7. When the event is over, repeat steps 2-6.

Take a look at the way Brett publicizes Pubcon for some more ideas on how this works. There is always content there, whether for the upcoming one or the prededing one, plus some evergreen content that applies to every festival.

community building, giving incentive to sign up for newsletters or updates etc .. not sure of the best way to acheive that?

You can always put up a generic sign up for our newsletter link for the general public. I would worry more about the sponsors and exhibitors for the following year, particularly if you don't have next year's registration form in place. There it's a good idea to have them sign up for an email when the registration info is in place so they will come back at the appropriate time.

I know forums don't really work for these type of sites..

I don't see where this would fit -- or add much value to what your site could offer.

And probably the most important, how to generate income from the site .. I suppose that could be in terms of added value to any interested sponsors of the event but surely that only comes in to play when you can show a decent user base or unique visitors..

Consider whether having an income-generating website is really what you want to do here. Sure, it would be nice to raise some extra cash for the event, but I would think in terms of the event sponsors as a way of getting them to commit so support you early [Mr. potential sponsor, I know that our festival isn't until next July, but if you sign up at our Platinum level now, you can have a graphic link to your website from the event website for the next nine months...] Particularly in the early stages when you're trying to get DMOZ, C of C, etc links, you don't want to look like a MFA site.

And Search Rankings, how would you expect to get any responce when content is so thin on the ground.. I'm guessing link development but any other ideas?

My experience is that if you follow the steps above, you will easily rank for your festival's name. I think this is a case of old fashioned on-page SEO here -- you're not trying to rank for vi***a. With any luck, you may be able to get decent rankings for your town's name.

3. After you get the site up and running, think about getting links from ......

Don't forget to submit your event info to related sites that have an "coming events" calendar. Some of these sites might be more local and some national. But they will probably provide a link to your site.

Also if you have a town festival that has a craft show and a car show as part of they event, you have three categories of possible sites to list your event on.

Festivals
Craft Shows
Car Shows

So be sure to look for possible places to list your event in all the relevant categories.

Beyond that get started as early as possible. Some event listing sites will post your event a year (or more) in advance if you get the info to them.

jonrichd gave some great advice.