Here's hoping that it is false pregnacy. I would check with your vet, if it is possible. It does take 6 months for hormones to completely disapate after a spay/nueter. Somehow I don't think there is a chance that a pregnacy occurred. That is unless they performed a vasectomy instead of castration.
What you described is not line breeding, but inbreeding.
I'll try to explain the implications of inbreeding. Inbreeding is not something that is encouraged, however there have been very experienced breeders that have done it. It is a way to find out if you have any genetic unsoundness in your line. Any fault you have, you're locking it in, just as you are locking in good traits. In other words, it can turn out just fine, or if you have any genetic problems they have a greater chance of showing up.
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