Setting up Malayalam on Ubuntu or for that matter any other GNU/Linux distribution like Fedora, Mandriva has been progressively getting easier thanks to the wonderful effort of the free software community going by the name "Swathanthra Malayalam Computing" or SMC in short. Most of the patches and tweaks have gone upstream to the OS trunks and most distros are already Malayalam capable. A few minor tweaks are required to set up reading and writing in Malayalam in the latest version of Ubuntu 8.10 - Intrepid Ibex

The steps required are as follows: -
1) Enable Malayalam in the Language Settings
2) Enable SCIM
3) Install Swanalekha - scim-ml-phonetic
4) Install Malayalam Fonts

We have compiled the complete process into a ready to use script. All you have to do is open a terminal and then run
sudo bash
to start another shell as the root user. Now copy and paste the following code into a text file and save the text file as install-ml.sh on your Desktop.

apt-get install language-support-ml language-pack-ml language-pack-gnome-ml language-pack-gnome-ml-base language-pack-kde-ml language-pack-kde-ml-base

apt-get install scim scim-gtk2-immodule m17n-contrib scim-m17n

wget http://download.savannah.gnu.org/releases/smc/Swanalekha/scim-ml-phonetic_0.1.3-2_all.deb
dpkg -i scim-ml-phonetic_0.1.3-2_all.deb

wget http://ftp.jp.debian.org/debian/pool/main/t/ttf-indic-fonts/ttf-malayalam-fonts_0.5.4_all.deb
dpkg -i ttf-malayalam-fonts_0.5.4_all.deb

touch /etc/X11/Xsession.d/74custom-scim_startup
chmod 646 /etc/X11/Xsession.d/74custom-scim_startup
echo 'export XMODIFIERS="@im=SCIM"' >> /etc/X11/Xsession.d/74custom-scim_startup
echo 'export GTK_IM_MODULE="scim"' >> /etc/X11/Xsession.d/74custom-scim_startup
echo 'export XIM_PROGRAM="scim -d"' >> /etc/X11/Xsession.d/74custom-scim_startup
echo 'export QT_IM_MODULE="scim"' >> /etc/X11/Xsession.d/74custom-scim_startup
chmod 644 /etc/X11/Xsession.d/74custom-scim_startup

In the terminal that you had opened type source ~/Desktop/install-ml.sh Make sure that you don't see any errors or warnings. Answer any questions in the affirmative and that is it. Your Ubuntu Intrepid Ibex box is ready for Malayalam. Restart X (Ctrl + Alt + Backspace) or reboot and make sure that SCIM icon (a keyboard) comes in your notification area.

Once you login back click on the SCIM icon and you should see a menu with the list of languages. Go to Malayalam and select Phonetic. This corresponds to swanalekha transliteration scheme for Malayalam. You can switch back to English by pressing Ctrl + Space keys. Open any text editor and you should be able to switch between the schemes and type Malayalam or English

You can get more information about SMC and its activities at Swathanthra Malayalam Computing (SMC) website

References:
http://libregeek.blogspot.com/2008/04/ubuntu-804-review-by-malayalam-user.html
Swanalekha on FCI Wiki