For reading web pages in malayalam:

You have to install a Malayalam unicode font that will represent the characters correctly
for that save the following ttf file to your desktop
http://varamozhi.sourceforge.net/fonts/AnjaliOldLipi.ttf∞

Microsoft Windows users : Copy the font from Desktop to the Windows font folder ,which can be accessed by clicking 'Fonts' option in the Control Panel
Or common locations like C:\WINDOWS\Fonts or C:\WINNT\Fonts.

Restart your web browser
Now change the Browsers font to AnjaliOldLipi .
Firefox-2.0 users can access Tools-> Options... ->Content ->Fonts & Colors



For writing in malayalam:

The simplest option is to use Varamozhi∞ Online by Peringodan

http://peringz.googlepages.com/mozhi.htm∞
OR
http://quillpad.in/malayalam/∞



References:
http://en.wikibooks.org/wiki/Guide_for_Using_Malayalam_in_Computer∞
http://malayalam-blogs.blogspot.com/∞
http://www.clickeralam.org/product.html∞