Well, personally I think the system underestimates the disadvantages of being an animal.
First off, no hands mean no weapons. Especially, no magical weapons. All a dog can hope for is (Greater) Magic Fang. All armor has to be specially made. No spellcasting, since you can't use Somatic or Material compenents, unless you take two feats. So you'd better have an ally if you want to get those damage resistant monsters. Dogs have no means of making ranged attacks at all, which means they're right up front every time.
No hands means a dog can't climb a rope or a ladder (unless the ladder is slanted). A dog can't open a door, except by bashing into it and hoping someone answers. In fact, a dog really can't open much of anything, unless it's specially designed for a dog to open. Paws and jaws aren't suited for fine tasks like that.
These are just some of the numerous ways not having hands is a burden. There's other things too... dogs can't swim well, they only doggie paddle, because they don't have the right muscles for it like humans do.
Now, I'm not saying that a Riding Dog (note, not a normal dog) should be ECL +0. I think +2 is more in line, as opposed to +3. Really my issue is that I think that "No Hands" should be -1.0 at least. I have a little issue with Awaken as well, I'm not sure the designers took into account animals gaining class levels.
Sorry, didn't mean to rant so much.
LightPhoenix