While reading some posts I noticed someone said that Shandalar cannot be killed. I thought so too at first. When I got back from his quest I was extremely dissapointed by the paltry 500exp he offers as a reward. So I did what anyone would, I attacked. =)
It took me a few tries but I finally got it. I only used two characters. My main character (Mondian, level 7 Ranger) and Imoen (7th level dual classed mage). First, I got the rest of my group waaaay off screen so they wouldn't get hit by the crossfire. Then I placed Imoen on one side of Shandalar and Mondian on the other side ( a little farther away, so he wouldn't be attacked by Shandalar). Before I started the battle I cast blur, minor globe of invulnerability, and protection from petrification. The only things I could find that actually did damage to Shandalar were Magic Missiles and the Ring of Energy (off the Red Wizards of Thay). After all the protection spells were cast I started raining down magic missiles and energy rays on him. He cast a lot of fireballs and lightnings at Imoen but she was of course immune to them and she resisted his two tries at Chaos and his one Stone Gaze. This was the only way I could kill him. If I just used Imoen I couldn't kill him fast enough and he would dimension door away.
He gave a nice 26,000exp, Robe of the Neutral Archmagi, and all the spells they sell at the Ulgoth's Beard Inn. The reputation fall was 10 points, but I easily made that up at the nearest temple and still made a profit off of him
Have fun killing him, and remember, Don't take no crap from nobody!