There is no hard requirement on what form your Lords of Madness element must take, but the connection must exist. Templates, races, and racial level progressions are explicitly allowed (even those found in Dragon Magazine)so is or isn't dragon material acceptable? you have both...
As a quick recap: No Dragon Magazine (Dragon Compendium is acceptable), 3.0 content is allowed unless it has been updated to 3.5
and to clarify, since this is e8, that means BAB +8 is ok, and 4th lvl spells/powers are ok, and skill ranks can be higher, etc... because all of these things break e6 :)