Junk characters in right window
When everything is OK right window should show real Malayalam. If you see only some obscure English like characters in there, then your font installation is not proper.
Remember, varamozhi installation never does any font installation. One need to do that manually.
By default, Varamozhi uses Mathrubhumi (Matweb) font. If you haven't alreadly installed that font, please copy .ttf files from font directory inside Varamozhi installation ( typically C:\Program Files\Varamozhi Editor\font) to C:\WINDOWS\Fonts or C:\WINNT\Fonts.
If you need more fonts please visit Varamozhi Font Cache.