diff --git a/pkg/apis/autoscaling/v1alpha1/pa_lifecycle.go b/pkg/apis/autoscaling/v1alpha1/pa_lifecycle.go
index cc63731e8697..23e6c3e7a09b 100644
--- a/pkg/apis/autoscaling/v1alpha1/pa_lifecycle.go
+++ b/pkg/apis/autoscaling/v1alpha1/pa_lifecycle.go
@@ -186,6 +186,11 @@ func (pas *PodAutoscalerStatus) MarkScaleTargetInitialized() {
 	podCondSet.Manage(pas).MarkTrue(PodAutoscalerConditionScaleTargetInitialized)
 }
 
+// IsSKSReady returns true if the PA condition denoting that SKS is ready.
+func (pas *PodAutoscalerStatus) IsSKSReady() bool {
+	return pas.GetCondition(PodAutoscalerSKSReady).IsTrue()
+}
+
 // MarkSKSReady marks the PA condition denoting that SKS is ready.
 func (pas *PodAutoscalerStatus) MarkSKSReady() {
 	podCondSet.Manage(pas).MarkTrue(PodAutoscalerSKSReady)
diff --git a/pkg/apis/autoscaling/v1alpha1/pa_lifecycle_test.go b/pkg/apis/autoscaling/v1alpha1/pa_lifecycle_test.go
index 1fcca085bfe5..799ed8d5e871 100644
--- a/pkg/apis/autoscaling/v1alpha1/pa_lifecycle_test.go
+++ b/pkg/apis/autoscaling/v1alpha1/pa_lifecycle_test.go
@@ -1212,3 +1212,18 @@ func TestIsScaleTargetInitialized(t *testing.T) {
 		t.Errorf("after marking initially active: got: %v, want: %v", got, want)
 	}
 }
+
+func TestIsSKSReady(t *testing.T) {
+	p := PodAutoscaler{}
+	if got, want := p.Status.IsSKSReady(), false; got != want {
+		t.Errorf("before marking SKS ready: got: %v, want: %v", got, want)
+	}
+	p.Status.MarkSKSReady()
+	if got, want := p.Status.IsSKSReady(), true; got != want {
+		t.Errorf("after marking SKS ready: got: %v, want: %v", got, want)
+	}
+	p.Status.MarkSKSNotReady("not ready")
+	if got, want := p.Status.IsSKSReady(), false; got != want {
+		t.Errorf("after marking SKS not ready: got: %v, want: %v", got, want)
+	}
+}
diff --git a/pkg/reconciler/autoscaling/kpa/kpa.go b/pkg/reconciler/autoscaling/kpa/kpa.go
index 3a487578d9b3..b6acec22413b 100644
--- a/pkg/reconciler/autoscaling/kpa/kpa.go
+++ b/pkg/reconciler/autoscaling/kpa/kpa.go
@@ -44,6 +44,8 @@ import (
 	corev1listers "k8s.io/client-go/listers/core/v1"
 )
 
+const noPrivateServiceName = "No Private Service Name"
+
 // podCounts keeps record of various numbers of pods
 // for each revision.
 type podCounts struct {
@@ -85,7 +87,7 @@ func (c *Reconciler) ReconcileKind(ctx context.Context, pa *pav1alpha1.PodAutosc
 		if _, err = c.ReconcileSKS(ctx, pa, nv1alpha1.SKSOperationModeServe, 0 /*numActivators == all*/); err != nil {
 			return fmt.Errorf("error reconciling SKS: %w", err)
 		}
-		pa.Status.MarkSKSNotReady("No Private Service Name") // In both cases this is true.
+		pa.Status.MarkSKSNotReady(noPrivateServiceName) // In both cases this is true.
 		return computeStatus(ctx, pa, podCounts{want: scaleUnknown}, logger)
 	}
 
@@ -219,24 +221,30 @@ func reportMetrics(pa *pav1alpha1.PodAutoscaler, pc podCounts) error {
 }
 
 // computeActiveCondition updates the status of a PA given the current scale (got), desired scale (want)
-// and the current status, as per the following table:
+// active threshold (min), and the current status, as per the following table:
 //
-//    | Want | Got    | Status     | New status |
-//    | 0    | <any>  | <any>      | inactive   |
-//    | >0   | < min  | <any>      | activating |
-//    | >0   | >= min | <any>      | active     |
-//    | -1   | < min  | inactive   | inactive   |
-//    | -1   | < min  | activating | activating |
-//    | -1   | < min  | active     | activating |
-//    | -1   | >= min | inactive   | inactive   |
-//    | -1   | >= min | activating | active     |
-//    | -1   | >= min | active     | active     |
+//    | Want | Got    | min   | Status     | New status |
+//    | 0    | <any>  | <any> | <any>      | inactive   |
+//    | >0   | < min  | <any> | <any>      | activating |
+//    | >0   | >= min | <any> | <any>      | active     |
+//    | -1   | < min  | <any> | inactive   | inactive   |
+//    | -1   | < min  | <any> | activating | activating |
+//    | -1   | < min  | <any> | active     | activating |
+//    | -1   | >= min | <any> | inactive   | inactive   |
+//    | -1   | >= min | 0     | activating | inactive   |
+//    | -1   | >= min | 0     | active     | inactive   | <-- this case technically is impossible.
+//    | -1   | >= min | >0    | activating | active     |
+//    | -1   | >= min | >0    | active     | active     |
 func computeActiveCondition(ctx context.Context, pa *pav1alpha1.PodAutoscaler, pc podCounts) {
 	minReady := activeThreshold(ctx, pa)
+	if pc.ready >= minReady {
+		pa.Status.MarkScaleTargetInitialized()
+	}
 
 	switch {
-	case pc.want == 0:
-		if pa.Status.IsActivating() {
+	// Need to check for minReady = 0 because in the initialScale 0 case, pc.want will be -1.
+	case pc.want == 0 || minReady == 0:
+		if pa.Status.IsActivating() && minReady > 0 {
 			// We only ever scale to zero while activating if we fail to activate within the progress deadline.
 			pa.Status.MarkInactive("TimedOut", "The target could not be activated.")
 		} else {
@@ -247,12 +255,19 @@ func computeActiveCondition(ctx context.Context, pa *pav1alpha1.PodAutoscaler, p
 		if pc.want > 0 || !pa.Status.IsInactive() {
 			pa.Status.MarkActivating(
 				"Queued", "Requests to the target are being buffered as resources are provisioned.")
+		} else {
+			// This is for the initialScale 0 case. In the first iteration, minReady is 0,
+			// but for the following iterations, minReady is 1. pc.want will continue being
+			// -1 until we start receiving metrics, so we will end up here.
+			// Even though PA is already been marked as inactive in the first iteration, we
+			// still need to set it again. Otherwise reconciliation will fail with NewObservedGenFailure
+			// because we cannot go through one iteration of reconciliation without setting
+			// some status.
+			pa.Status.MarkInactive("NoTraffic", "The target is not receiving traffic.")
 		}
 
 	case pc.ready >= minReady:
 		if pc.want > 0 || !pa.Status.IsInactive() {
-			pa.Status.MarkScaleTargetInitialized()
-			// SKS should already be active.
 			pa.Status.MarkActive()
 		}
 	}
diff --git a/pkg/reconciler/autoscaling/kpa/kpa_test.go b/pkg/reconciler/autoscaling/kpa/kpa_test.go
index f7f5e109db56..74906e59bf44 100644
--- a/pkg/reconciler/autoscaling/kpa/kpa_test.go
+++ b/pkg/reconciler/autoscaling/kpa/kpa_test.go
@@ -109,6 +109,14 @@ func defaultConfigMapData() map[string]string {
 	}
 }
 
+func initialScaleZeroConfigMap() *autoscalerconfig.Config {
+	autoscalerConfig, _ := autoscalerconfig.NewConfigFromMap(defaultConfigMapData())
+	autoscalerConfig.AllowZeroInitialScale = true
+	autoscalerConfig.InitialScale = 0
+	autoscalerConfig.EnableScaleToZero = true
+	return autoscalerConfig
+}
+
 func defaultConfig() *config.Config {
 	autoscalerConfig, _ := autoscalerconfig.NewConfigFromMap(defaultConfigMapData())
 	deploymentConfig, _ := deployment.NewConfigFromMap(map[string]string{
@@ -166,6 +174,15 @@ func sksNoConds(s *nv1a1.ServerlessService) {
 	s.Status.Status = duckv1.Status{}
 }
 
+func metricWithASConfig(ns, n string, asConfig *autoscalerconfig.Config, opts ...metricOption) *asv1a1.Metric {
+	pa := kpa(ns, n)
+	m := aresources.MakeMetric(pa, kmeta.ChildName(n, "-private"), asConfig)
+	for _, o := range opts {
+		o(m)
+	}
+	return m
+}
+
 func sks(ns, n string, so ...SKSOption) *nv1a1.ServerlessService {
 	kpa := kpa(ns, n)
 	s := aresources.MakeSKS(kpa, nv1a1.SKSOperationModeServe, scaling.MinActivators)
@@ -211,6 +228,7 @@ func TestReconcile(t *testing.T) {
 		unknownScale = scaleUnknown
 		underscale   = defaultScale - 1
 		overscale    = defaultScale + 1
+		asConfigKey  = ""
 	)
 
 	// Set up a default deployment with the appropriate scale so that we don't
@@ -716,7 +734,7 @@ func TestReconcile(t *testing.T) {
 			deploy(testNamespace, testRevision),
 		}, defaultReady...),
 		WantStatusUpdates: []clientgotesting.UpdateActionImpl{{
-			Object: kpa(testNamespace, testRevision, withScales(1, 0),
+			Object: kpa(testNamespace, testRevision, markScaleTargetInitialized, withScales(1, 0),
 				WithPASKSReady, WithPAMetricsService(privateSvc),
 				WithNoTraffic("NoTraffic", "The target is not receiving traffic."),
 				WithPAStatusService(testRevision), WithPAMetricsService(privateSvc),
@@ -753,7 +771,7 @@ func TestReconcile(t *testing.T) {
 			deploy(testNamespace, testRevision),
 		}, defaultReady...),
 		WantStatusUpdates: []clientgotesting.UpdateActionImpl{{
-			Object: kpa(testNamespace, testRevision, WithPASKSReady, WithPAMetricsService(privateSvc),
+			Object: kpa(testNamespace, testRevision, markScaleTargetInitialized, WithPASKSReady, WithPAMetricsService(privateSvc),
 				WithNoTraffic("TimedOut", "The target could not be activated."), withScales(1, 0),
 				WithPAStatusService(testRevision), WithPAMetricsService(privateSvc),
 				WithObservedGeneration(1)),
@@ -1039,6 +1057,76 @@ func TestReconcile(t *testing.T) {
 			Name:       deployName,
 			Patch:      []byte(fmt.Sprintf(`[{"op":"replace","path":"/spec/replicas","value":%d}]`, 20)),
 		}},
+	}, {
+		Name: "initial scale zero: scale to zero",
+		Key:  key,
+		Ctx: context.WithValue(context.WithValue(context.Background(), asConfigKey, initialScaleZeroConfigMap()), deciderKey,
+			decider(testNamespace, testRevision, -1, /* desiredScale */
+				0 /* ebc */, scaling.MinActivators)),
+		Objects: append([]runtime.Object{
+			kpa(testNamespace, testRevision, withScales(0, -1), WithReachabilityReachable,
+				WithPAMetricsService(privateSvc), WithPASKSNotReady(noPrivateServiceName),
+			),
+			// SKS won't be ready bc no ready endpoints, but private service name will be populated.
+			sks(testNamespace, testRevision, WithDeployRef(deployName), WithPrivateService),
+			metric(testNamespace, testRevision),
+			deploy(testNamespace, testRevision, func(d *appsv1.Deployment) {
+				d.Spec.Replicas = ptr.Int32(0)
+			}),
+		}, makeReadyPods(0, testNamespace, testRevision)...),
+		WantStatusUpdates: []clientgotesting.UpdateActionImpl{{
+			Object: kpa(testNamespace, testRevision, markScaleTargetInitialized,
+				WithNoTraffic("NoTraffic", "The target is not receiving traffic."),
+				withScales(0, -1), WithReachabilityReachable,
+				WithPAMetricsService(privateSvc), WithObservedGeneration(1),
+				WithPASKSNotReady(""),
+			),
+		}},
+	}, {
+		Name: "initial scale zero: stay at zero",
+		Key:  key,
+		Ctx: context.WithValue(context.WithValue(context.Background(), asConfigKey, initialScaleZeroConfigMap()), deciderKey,
+			decider(testNamespace, testRevision, -1, /* desiredScale */
+				0 /* ebc */, scaling.MinActivators)),
+		Objects: append([]runtime.Object{
+			kpa(testNamespace, testRevision, markScaleTargetInitialized, withScales(0, scaleUnknown),
+				WithReachabilityReachable, WithPAMetricsService(privateSvc), WithPASKSNotReady(""),
+			),
+			sks(testNamespace, testRevision, WithDeployRef(deployName), WithPrivateService),
+			metric(testNamespace, testRevision),
+			deploy(testNamespace, testRevision, func(d *appsv1.Deployment) {
+				d.Spec.Replicas = ptr.Int32(0)
+			}),
+		}, makeReadyPods(0, testNamespace, testRevision)...),
+		WantStatusUpdates: []clientgotesting.UpdateActionImpl{{
+			Object: kpa(testNamespace, testRevision, WithPASKSNotReady(""), WithBufferedTraffic, markScaleTargetInitialized,
+				withScales(0, scaleUnknown), WithReachabilityReachable,
+				WithPAMetricsService(privateSvc), WithObservedGeneration(1),
+			),
+		}},
+	}, {
+		Name: "initial scale zero: scale to greater than zero",
+		Key:  key,
+		Ctx: context.WithValue(context.WithValue(context.Background(), asConfigKey, initialScaleZeroConfigMap()), deciderKey,
+			decider(testNamespace, testRevision, 2, /* desiredScale */
+				-42 /* ebc */, scaling.MinActivators)),
+		Objects: append([]runtime.Object{
+			kpa(testNamespace, testRevision, markScaleTargetInitialized, withScales(2, 2),
+				WithReachabilityReachable, WithPAStatusService(testRevision), WithPAMetricsService(privateSvc),
+				WithPASKSReady,
+			),
+			sks(testNamespace, testRevision, WithDeployRef(deployName), WithProxyMode, WithSKSReady, WithPrivateService),
+			metricWithASConfig(testNamespace, testRevision, initialScaleZeroConfigMap()),
+			deploy(testNamespace, testRevision, func(d *appsv1.Deployment) {
+				d.Spec.Replicas = ptr.Int32(2)
+			}),
+		}, makeReadyPods(2, testNamespace, testRevision)...),
+		WantStatusUpdates: []clientgotesting.UpdateActionImpl{{
+			Object: kpa(testNamespace, testRevision, WithTraffic, WithPASKSReady, markScaleTargetInitialized,
+				withScales(2, 2), WithReachabilityReachable, WithPAStatusService(testRevision),
+				WithPAMetricsService(privateSvc), WithObservedGeneration(1),
+			),
+		}},
 	}}
 
 	table.Test(t, MakeFactory(func(ctx context.Context, listers *Listers, cmw configmap.Watcher) controller.Reconciler {
@@ -1061,6 +1149,10 @@ func TestReconcile(t *testing.T) {
 			fakeDeciders.Create(ctx, d.(*scaling.Decider))
 		}
 
+		testConfigs := defaultConfig()
+		if asConfig := ctx.Value(asConfigKey); asConfig != nil {
+			testConfigs.Autoscaler = asConfig.(*autoscalerconfig.Config)
+		}
 		psf := podscalable.Get(ctx)
 		scaler := newScaler(ctx, psf, func(interface{}, time.Duration) {})
 		scaler.activatorProbe = func(*asv1a1.PodAutoscaler, http.RoundTripper) (bool, error) { return true, nil }
@@ -1079,7 +1171,7 @@ func TestReconcile(t *testing.T) {
 			servingclient.Get(ctx), listers.GetPodAutoscalerLister(),
 			controller.GetEventRecorder(ctx), r, autoscaling.KPA,
 			controller.Options{
-				ConfigStore: &testConfigStore{config: defaultConfig()},
+				ConfigStore: &testConfigStore{config: testConfigs},
 			})
 	}))
 }
diff --git a/pkg/reconciler/autoscaling/kpa/scaler_test.go b/pkg/reconciler/autoscaling/kpa/scaler_test.go
index a4d7e482a30f..4fc64091fbc2 100644
--- a/pkg/reconciler/autoscaling/kpa/scaler_test.go
+++ b/pkg/reconciler/autoscaling/kpa/scaler_test.go
@@ -437,6 +437,20 @@ func TestScaler(t *testing.T) {
 			paMarkActivating(k, time.Now())
 			k.ObjectMeta.Annotations[autoscaling.InitialScaleAnnotationKey] = "5"
 		},
+	}, {
+		label:         "reaching initial scale zero",
+		startReplicas: 0,
+		scaleTo:       0,
+		wantReplicas:  0,
+		wantScaling:   false,
+		wantCBCount:   1,
+		paMutation: func(k *pav1alpha1.PodAutoscaler) {
+			paMarkInactive(k, time.Now())
+			k.ObjectMeta.Annotations[autoscaling.InitialScaleAnnotationKey] = "0"
+		},
+		configMutator: func(c *config.Config) {
+			c.Autoscaler.AllowZeroInitialScale = true
+		},
 	}}
 
 	for _, test := range tests {
diff --git a/test/e2e/initial_scale_test.go b/test/e2e/initial_scale_test.go
index 4f24ad858137..ac27f4c3245c 100644
--- a/test/e2e/initial_scale_test.go
+++ b/test/e2e/initial_scale_test.go
@@ -37,7 +37,6 @@ import (
 // the revision level. This test runs after the cluster wide flag allow-zero-initial-scale
 // is set to true.
 func TestInitScaleZero(t *testing.T) {
-	t.Skip()
 	t.Parallel()
 	cancel := logstream.Start(t)
 	defer cancel()