The homeodomain protein Distal-less-3 (Dlx3) plays a crucial role during embryonic development. This transcription factor is known to be essential for placental formation and to be involved in skin and skeletal organogenesis. In humans, a frameshift mutation in the coding sequence of the DLX3 gene results in an ectodermal dysplasia called Tricho-Dento-Osseous syndrome (TDO). The main features of this autosomal dominant disorder are defects in hair, teeth, and bone. To investigate the functional alterations caused by the mutated DLX3(TDO) isoform ex vivo, we used tetracycline-inducible osteoblastic and keratinocyte cell lines and calvarial derived osteoblasts in which the expression of DLX3(WT) and/or DLX3(TDO) could be regulated and monitored. Immunocytochemical analysis revealed that both DLX3(WT) and DLX3(TDO) recombinant proteins are targeted to the nucleus. However, as demonstrated by electrophoresis mobility shift assay, DLX3(TDO) is not able to bind to the canonical Dlx3 binding site. Furthermore, we demonstrate that the frameshifted C-terminal domain in DLX3(TDO) is accountable for the loss of DNA binding activity because the C-terminal domain in DLX3(WT) is not required for DNA binding activity. Although DLX3(TDO) alone cannot bind to a Dlx3 responsive element, when DLX3(WT) and DLX3(TDO) are co-expressed they form a complex that can bind DNA. Concomitant with the inability to bind DNA, DLX3(TDO) has a defective transcriptional activity. Moreover, the transcriptional activity of DLX3(WT) is significantly reduced in the presence of the mutated isoform, indicating that DLX3(TDO) has a dominant negative effect on DLX3(WT) transcriptional activity.