I concur with Mike...and take the time (and relatively small outflow) to consult with an experienced civil attorney regarding slander.  Very difficult to prove, however the note from the one Board member and the payment of the stipend (since it was contingent on not trashing the house and doing everything in your contract) may be the starting point for the suit.

Resolve ASAP, try to insulate the theater from harm, and get those bills (including your attorney fees) paid by the AD.

>>1 - There are many nice people on this board, and they do provide a service for the community so our desire is not to jeopardize the whole group. But, other than a lawsuit, what can we do to stop what is quickly becoming character defamation and slander that has already cost us 2 directing jobs.<<

The nice people on the board are not doing enough. They may be nice, but they are allowing the treatment. You need to forget about ever serving this group again. I had an experience of serving above and beyond the call of duty a well known community theater and experiencing some disgraceful treatment from the president and some board members. I walked away. They loose. You need to give your services to groups hungry enough to want them.  The group you describe and the group I walked away from, are not. Some groups do great shows and know that no matter how they treat folks, most theater people will tolerate crummy treatment just to be in their next show. I have never understood that about people. That is why there is crummy treatment. Being in a great show is just not important enough for me to tolerate bad treatment.

I am no lawyer, but as to the slander aspect, my understanding is that any lawyer will ask you what your actual damages are in dollars. You will likely find that your damages, should you actually be able to prove them at trial, are not enough to warant the expense of a trial.

2 - Although there are nice people on this board, several of them know about the situation and have apologized for the Artistic Director, stating he is upset as his wife recently died, but have done nothing about the sitution. Do we now address the issue as one that the entire board is responsible for?

Yes. I got that same rap: Oh, he ( the bad behavior guy) is just one person. That is a 4th grade line of reasoning. The theater is run by a board who is choosing to look the other way for the sake of peace. The board could take the hard way and shut this person down. You are the write off. That is easier. One can not serve on a board and blame the theater's operations on someone else.

3 - If we go before the board and ask for a resolution, other than the obvious payment of monies due us and our vendor, what should be ask for that would restore our reputations? Letters to all involved?

Yes. You can also bang your head against a wall. If the board has tolerated the situation this long, it is unlikely they will give you a satisfactory letter. It may well come down to this person VS you. They likely have a long history of liking this person. People tend to believe what they want to belived. Some of the board members may well believe that you are the problem. It is tough to swallow, but you likely have to just swallow it and move on.

Consider sending a letter to the vendor explaining the truth. If you put anything in writing, be careful to use only proveable facts. You could wind up on the defending end of a lawsuit. Is this vendor billing the theater company direct?

Well obviously the theatre group has not completed their contract with you! As there are still an outstanding payment owed, in the way of a reimbursement.  Assuming you incurred the expense in good faith  on their behalf, forming part of the accepted authorised budget &/or final wash up of the production accounts. Therefore that may be deemed as in breach of the contract as either written, implied &/or verbally agreed, in order to fulfil all contractual obligations.
As far as satisfying the Vendor, so long as you did not give any form of personnel guarantee as liability of payment for their services. The Onus is on the board to pay up! Basically the Vendor cannot & should not be made to suffer the liability for any loss allegedly created by others -  no matter what excuse the Board may deem appropriate.
If the Board refused to pay the theatres Electricity Supply bill, using the same limp excuse, it would soon be switched off & put completely in the dark.
The fist thing you should do is allow all the rubbish, wash past you, accept it for what ?IT? is - Garbage! With any legal action you win, loose or draw- you will still be counted as the Baddie! Because this AD is obviously Termite?n you, as you may have bruised or stepped on her delicate ego. Even if you secure an apology written or otherwise, IT is not going to be completely resolved. The ?Chinese Whisper? campaign of the AD?s, will still be out there spreading  like a cancer. Nothing you can do will stop IT!
Allow time for the AD to be  kicked off her perch! - Like water finds it?s own level, it will happen eventually!.
In the mean time carry on as before & don?t worry! Use IT as a negative & add your positive to create a workable circuit. Remember you can have as many positives as you like but IT won?t work without at least one negative.  {Power/current actually flows from negative to positive(- to +)  - not as in the conventional theory (+ to -)}

Chookas Anon.