Yes it is legal. Donald X does his official card-testing on it, so he is absolutely fine with it.
What's this now? I don't think there have ever been cards on Isotropic that aren't published yet. This sounds like a mutated version of the fact (from the Isotropic FAQ) that Donald X helpfully provided the set of prototype
artwork that he used for the Kingdom cards. (They all seem to be free images anyway, from places like Wikipedia, but it's nice that Donald himself picked them out.)
I'm not even nearly a lawyer, but I've used online game sites enough to speculate about the legality. In an alternate universe where Donald X didn't like Isotropic and felt like angering his biggest fan base, he could probably go after it for trademark infringement, because it titles itself "Online Dominion". But aside from that, Isotropic should be totally legal because you can't copyright the act of playing a particular game. You can only copyright the rules and what the game looks like, and Isotropic doesn't publish the rules and makes sure to look different from Dominion.