The hypoxia-inducible factor alpha subunits 1 and 2 (HIF-1alpha and HIF-2alpha) are subjected to oxygen-dependent asparaginyl hydroxylation, a modification that represses the carboxyl-terminal transactivation domain (CAD) at normoxia by preventing recruitment of the p300/cAMP-response element-binding protein coactivators. This hydroxylation is performed by the novel asparaginyl hydroxylase, factor-inhibiting HIF-1' (FIH-1), of which HIF-1alpha and HIF-2alpha are the only reported substrates. Here we investigated the substrate requirements of FIH-1 by characterizing its subcellular localization and by examining amino acids within the HIF-1alpha substrate for their importance in recognition and catalysis by FIH-1. Using immunohistochemistry, we showed that both endogenous and transfected FIH-1 are primarily confined to the cytoplasm and remain there under normoxia and following treatment with the hypoxia mimetic, dipyridyl. Individual alanine mutations of seven conserved amino acids flanking the hydroxylated asparagine in HIF-1alpha revealed the importance of the valine (Val-802) adjacent to the targeted asparagine. The HIF-1alpha CAD V802A mutant exhibited a 4-fold lower V(max) in enzyme assays, whereas all other mutants were hydroxylated as efficiently as the wild type HIF-1alpha CAD. Furthermore, in cell-based assays the transcriptional activity of V802A was constitutive, suggesting negligible normoxic hydroxylation in HEK293T cells, whereas the wild type and other mutants were repressed under normoxia. Molecular modeling of the HIF-1alpha CAD V802A in complex with FIH-1 predicted an alteration in asparagine positioning compared with the wild type HIF-1alpha CAD, providing an explanation for the impaired catalysis observed and confirming the importance of Val-802 in asparaginyl hydroxylation by FIH-1.