Terrain is your friend
Take Detect Thoughts spell:
The spell can penetrate barriers, but 1 foot of stone, 1 inch of common metal, a thin sheet of lead, or 3 feet of wood or dirt blocks it.
Seek Thoughts - same limitation. Also, most areas of effect stop at obstructions. I don't have access to 3.5 monster manual anymore and Illithids are not open content, so I cannot check exact wording of the blast, but it is only reasonable to say (house-rule, if needed) that hiding behind a corner makes you immune to the blast, especially if said corner is made of the right material. If your players know that, they should be able to alter their strategy and not face Illithid directly. Luring them in place where he can only target one of the PC at a time and shooting it from distance larger than his blast would do the trick.
To use this method, as a DM it is your role to make sure players know it is an option (as their PC probably should know), and to provide terrain properly suited for the purpose. You should also play on Illithid arrogance, so it is not cautious.
I have successfully used terrain to help my players in fight, letting them hide their weaknesses and play their strength.
Spell like abilities can be disrupted
As said by WotC here. You are using 3.5 monster, so it should have 3.5 penalties to his abilities to stay balanced. Make sure your Wizard and Bard realize that (from the second part of WotC article):
In most cases, one can disrupt a foe's spell-like ability in exactly the same way one disrupts a spell. For example, a creature's opponents can ready attacks to disrupt its spell-like abilities, and if they hit the creature while it uses a spell-like ability, they may cause the ability to fail. The DC for the creature's Concentration check is exactly the same as it would be if the creature were casting a spell.
Pathfinder roll20 site seems to agree on that:
A spell-like ability can be disrupted just as a spell can be.
So again, strategy! Let someone shot your Illithid in the face when he starts his blast. If needed, fudge his concentration roll to make him fail.
This is something I've used as a player, thanks to friendly reminder of my DM.
Spell like abilities can be dispelled
You say about mind-controlled orc minions. Bard of 7th level should be able to cast Dispel Magic. Wizard 5th, too. Both should be able to use Spellcraft or Knowledge or Sense Motive to recognize mind control. They could, and probably should, try to break this control. Pretty much all of the D&D lore shows that creatures that used to be enslaved by Illithids hate them when they are freed, so it would turn opponents into allies, and give Illithid other targets than the party.
As a DM, it is your duty to call appropriate skill check and then tell your players what their characters are supposed to know already. Then, they may adjust their strategy. But it is your duty to give them info, or at least to give them a chance to get that info, to make informed decision.
Bottom line: it is all strategy
Bard attacking and Wizard using AoE damage spells in their first rounds does not look like a winning team in my dozen or so years of play and DMing. Teams that have used Wizard as battlefield control (Walls, anyone?) and Bard as support (higher saves with inspire Courage or buff spells, please?) were what made parties successful against "boss" monsters. For some monsters, blasting and slashing them in the face just won't cut it. Illithids are supposed to be formidable enemy and PCs are supposed to be scared about loosing their minds when fighting them. They met first one. Now, they should plan what to do if they will meet next. And you should make sure that they will actually plan a strategy. And if that strategy is sane, make sure they'll get what they need to succeed, like spells in Ye Old Magic Shoppe, and decent terrain with a lot of corners.
XP are for overcoming an obstacle. No matter how you overcome it (sneak around, negotiation, killing), you get XP.
the wizard found the sword hidden away and decided to try and steal it. The Nothic noticed and engaged in combat,...
The obstacle is overcome only once in the description: because they failed in stealing the sword or negotiating for it, the obstacle had not been cleared yet, no XP were to be awarded as the Nothic was still an obstacle. Only the killing actually overcame the obstacle of the Nothic stopping them from getting the sword.
So the XP are only awarded for the killing.
Even if they had negotiated and then killed the Nothic, they would not have gotten the XP twice: that is an inclusive or, which means "(A) OR (B) OR (A&B)".
Best Answer
The rules don't say that player characters need to kill enemies to earn XP.
From the Core Rulebook, chapter 12 "Gamemastering" gives an overview of how to run combats and combat rewards. The text says that the players must "defeat" monsters or "overcome" the challenge in some way, but does not explicitly say that the enemy creatures must be killed by the players, let alone killed by anyone. On page 399, the section "Awarding Experience" says:
According to James Jacobs, one of the system's designers, enduring an encounter counts as the first time the players overcome it, regardless of whether the enemies survived. From the Paizo forums:
There are various gameplay consequences due to your GM's rule that XP is only given for killing blows. Players wouldn't gain XP if they rely on summoned creatures, mind-affecting spells (such as Confusion or Dominate Monster), or environmental objects to dispatch enemies. This rule doesn't account for non-creature hazards such as haunts or traps, which have CR values, and are common in Rise of the Runelords. It also discourages diplomacy, stealth, and other non-combat methods of handling encounters.
However, the GM decides the rules for rewarding XP.
The Gamemastery Guide, chapter 5 "Rewards" has some rough rules for how and when XP should be given to the players. The section is quite long (page 102-104) and begins with the following:
To summarize, the gist of the section is that the GM judges what encounters and conditions are worth rewarding XP. So if the GM rules that the players only get XP by delivering the "killing blow", then it's legal, even if the rulebooks don't support it.
What can you do about this?
As usual, the solution is "Talk to the GM." The GM is treating combat like a video game, and that's not working for you. Explain that you don't like this rule about killing blows. Not only because it's unsupported by the official rulebooks, but more importantly, that you think it's unfair to be withheld XP even after your characters endured a challenge or encounter.
Side note: Rise of the Runelords is an especially tough adventure path, with numerous encounters where an enemy NPC may flee. Falling behind on XP (and other resources) can make future encounters much more deadly. The players will need as much XP as they can earn.
When you talk to the GM, it may help to get input from the other players. Come up with a new agreement for how and when XP is rewarded.