This paper reports on a Centre for the Economics of Education and Training (CEET) project that explored policies, programs and other initiatives by Australia's states and territories to support innovation, and to build vocational education and training (VET) capability to respond to its effects on skill needs. The project was undertaken in late 2003-early 2004. CEET set out to document the range of initiatives adopted by the states and territories, their rationales and objectives, funding and major features; to highlight similarities and differences between the approaches and the various emphases being given to different aspects of VET, to types of skills and innovation and to VET-industry relationships; and to highlight best practice approaches. The author found that the states and territories are working to support innovation in industry and enterprises and to build VET capabilities to respond to it, but more could be done and some activities could be more effective. Findings include: (1) More co-operative and collaborative work is needed to reduce the current level of duplication in the provision of web-based support; (2) VET is poorly represented on innovation advisory bodies to governments; (3) Further opportunities could also be given for VET personnel to contribute to research and development, particularly in industry sectors in which they have a high level of expertise; and (4) There is considerable potential for states to learn from each other. (Contains 8 footnotes.)