Direct cut and paste from a Ravelry forum post I thought I might keep here for ease of reference. (I have linked all of these to their ravelry LYS page - if they have one. When I have time I'll find some more detailed weblinks.)
Twisted Threads is right in the centre of town - in the main street in fact! It has just been taken on by a new owner and would have the biggest variety of yarns. It is the only store in Geelong that is dedicated to knitting and needlework.
If you are keen to go into the suburbs, there is Busy Bee Fabrics in Belmont is an outlet for Bendigo Woollen Mills and has lots of pattern books, and there is the Belmont Drapery across the road that also has some yarns (once you get past all the old lady underwear!).
After that you may choose to head down the Bellarine Peninsula - there is the Ocean Grove sewing centre which has a selection of yarns, Wildpurl at Port Lonsdale - which is a homewares store with a yarn section out the back, and Coloured Jules at Queenscliff - which specialised in Hand painted mohair.
If you are heading that way you may want to stop at Drysdale. Not actually a yarn store - but Shiloh is a small farm specialising in natural coloured wool that is grown, scoured and spun in Geelong. Quite possibly a good place to get some unique souvineer wool. You will probably need to make an appointment thou (and if you are keen it is right next door to one of the main Bellarine wineries)
Depending on when you are in town you may also want to check out one of the weekend markets on the Peninsula - There are a couple of stalls (including GingerKnits - me!) that sell yarn and crafty stuff.
Heading south from Geelong along the coast you may want to check out some of our famous surf beaches, and while you’re there it would be the perfect oppotunity to check out Pear Tree Yarns in Torquay. Pear Tree also sources local producers and is scoured and spun in Geelong - and has some products to die for.
One last thing to mention - the National Wool Museum (external link) is located in Geelong and definitely worth a visit for any knitter. I don’t recommend you buy any yarn there thou - it is incredibly overprices (I think it has something like a 70% markup!). Save your pennies and go round the corner to Twisted Threads!