Wow, that is going to lead to some very strange, confusing stuff. I hope there will be some pretty easy way to see the family trees of critters/players and the known traits of their relatives. Hopefully it will be something of a balancing act to breed multiple traits, for instance you might have to sacrifice speed for aggresiveness, or strength for loyalty, unless you had
just the right parents.
Also, the traits should not be obvious except to a skilled trainer/breeder, so an inexperienced dwarf would have to observe a specific animal for a long time to figure out that it seems a little stronger than its siblings. Things like speed could be easier to spot than say, toughness, which you wouldn't notice until you saw that animal take a beating. This would put a little more guesswork into it.
It would be nice to breed for size, too, though I don't know if the current size system would allow for dogs that are only a hand or two taller than the others (or "toy" breeds for pets). Fur colors/patterns? (Gimli likes dalmations for their spots.) And what if you could breed dogs that were ferocious, but therefore harder to control? Where even "tame" dogs might refuse to follow a dwarf, or sometimes bite a dwarf it didn't like. This would allow for captured wild creatures to gradually become easier to tame and handle, til you have a nice docile breed for pets and zoos. Of course when it comes to magical traits, who knows what they might do.
Come to think of it, I might have more fun breeding cool animals than mining and forging.