Hypoxia is a common feature of solid tumors. The cellular response to hypoxic stress is controlled by a family of prolyl hydroxylases (PHD) and the transcription factor hypoxia-inducible factor 1 (HIF1). To investigate the relationship between PHD and HIF1 activity and cellular transformation, we characterized the expression levels of PHD isoforms across a lineage of cell strains with varying transformed characteristics. We found that PHD2 is the primary functional isoform in these cells and its levels are inversely correlated to tumor-forming potential. When PHD2 levels were altered with RNA interference in nontumorigenic fibroblasts, we found that small decreases can lead to malignant transformation, whereas severe decreases do not. Consistent with these results, direct inhibition of PHD2 was also shown to influence tumor-forming potential. Furthermore, we found that overexpression of PHD2 in malignant fibroblasts leads to loss of the tumorigenic phenotype. These changes correlated with HIF1alpha activity, glycolytic rates, vascular endothelial growth factor expression, and the ability to grow under hypoxic stress. These findings support a biphasic model for the relationship between PHD2 activity and malignant transformation.