The influence of physisorbed water on the sulfidation of a 4 wt % cobalt containing ion exchanged CoNaY catalyst is studied by X-ray absorption near edge structure (XANES) and extended X-ray absorption fine structure (EXAFS) and high resolution electron microscopy (HREM). Upon dehydrating ion exchanged CoNaY, the Co2+ ions migrate into the zeolite cation positions. This migration has a large influence on the catalyst sulfidation behavior. In the presence of physisorbed water sulfidation results in the formation of large Co9S8 particles at the outer surface of the zeolite. On the contrary, formation of highly dispersed "Cosulfide" species inside the zeolite cavities is observed when the physisorbed water is removed prior to sulfidation. The above findings confirm those obtained by Mossbauer emission spectroscopy (MES) and thiophene HDS activity measurements reported earlier (de Bent, P. W.; Vissenberg, M. J.; Boellaard, E.; van Santen, R. A.; de Beer, V. H. J.; van der Kraan, A. M. Bull. Sec. Chim. Belg. 1995, 104, 205). The dispersion of the Go-sulfide species formed after sulfidation at 673 K is not affected by varying the amount of cobalt (2, 4, and 8 wt %) in the dehydrated NaY zeolite as shown by the EXAFS and MES experiments.