There are two different kinds of mixers that have dough hooks:
One group (bowl locks into a fixed position, has only one "C" shaped dough hook, and has a planitary-motion head such as Hobart, KitchenAid, and 3-4 others) does indeed mix and knead the dough.
The other group is basically a hand mixer on a stand (the bowl is not locked into position and can/does turn during mixing, and generally has two straight dough hooks that look something like cork-screws) only mixes the dough - they do not knead it.
There are two different methods of making dough. One is the "sponge" method (a 2-step process) where the liquids and only a small portion of the flour are mixed and allowed to ferment to make a sponge (you could use the flat beater for this portion of the mixing) - then when you add the remainder of the flour to complete the mixing and kneading you would use the fough hook. The other method (1-step) is the "straight" dough method where everything is combined, mixed, and kneaded in one step with the dough hook.
If you look in the front part of your KitchenAid manual it explains what to use each of the attachments for: Flat beater is for normal to heavy mixtures that are not kneaded, Whip for incorporating air into light mixtures, Dough Hook for mixing and kneading yeast doughs (and other heavy kneaded doughs such as pasta dough).
How the dough hook works (kneads) is kind of neat when you stop to think about it. This is how a pastry chef friend of mine explained it to me. As the dough hook turns (after the dough is mixed and forms a ball on the hook) and begins to move toward the bowl - it presses the dough against the side of the bowl in an arc motion, the dough is held in place by friction and pressure (just the same as the dough would held in place between your hands and the board if you were kneading by hand), as it moves on it stretches and presses the dough against the side of the bowl which slightly deforms it, so as the hook continues to rotate the bulge on the "fat" side of the dough is pressed against the side of the bowl actually causes the dough to rotate slightly on the hook - and the process repeats itself over and over.