A player in a 8th level campaign against giants is a shadow dancer. He has a pet shadow that does strength damage and is incorpreal. The question is, can a humanoid like a giant ever hit the shadow without magic weapons? Or can the shadow kill a whole city of giants by doing touch attacks and draining their strength while being completely safe from harm? Seems like a unbalancing ability!
A Shadow is incorporeal. Incorporeal creatures can be hit only by magical weapons which do 50% damage. They are immune to nonmagical damage, regardless of magnitude (goes with the whole walking through walls thing).
Yes, it's pretty spiffy to be immune to something. More spiffy than simple energy resistance, less spiffy that immunity to magic like golems have. This would be a problem for a city of giants with no magic weapons, spellcasters, or clerics. Those are rare.
And if they happen to have one and grease the Shadowdancer's shadow, he gets a permanent negative level for his trouble. That's the game balance right there. A hill giant with a magic club (or a club some adept casts magic weapon or shillelagh or whatever) is likely going to kill it in one round, certainly before its strength is appreciably drained.
As has been mentioned, yes, this is how it works.
Addressing game balance: 3.x has almost none. The game is wildly, unbelievably imbalanced. (See here for a brief discussion of the Tiers and relevant links; it's not everything but it would be off-topic to go into much detail)
For a Despite claims to the contrary, Paizo did almost nothing significant to address this fact (and they made things a little bit worse almost as much as they made things a little bit better, but in all cases it's always a very little bit). See here for a very thorough 3.5/Pathfinder comparison by a fan of Pathfinder. I've linked to the conclusion that regardless of what else changed, it’s still the same game with a lot of the same problems and Pathfinder didn’t fix them.
So to begin with, you shouldn’t really be expecting much.
But this is not really a great example of severe imbalance. Basically, you cannot get the Shadowdancer’s Summon Shadow ability until ECL 8. By that time, creatures without magic are not real threats. DR/magic, occasionally in large quantities, is available by that level. 4th-level spells make life extremely difficult for the magically challenged (e.g. solid fog alone can end entire encounters against creatures who rely on physical attacks and do not have access to freedom of movement or teleportation effects).
So if you're throwing non-magical enemies at anyone who has Summon Shadow, you're doing some thing wrong.