Ily is usually read/said as all one word rather than pronounced as single letters such as 'I-L-Y'.
It is usually recieved as an affectionate term used more to describe your admiration for someone, rather than actual love, although can mean different things in different situations.
Friend to friend: "Ily girl!'
Texts: "Meet me by the cinema at 2 o'clock, ily, Fred"
Instant messenger: "Sorry, I g2g now, ily xxx"
Comment boxes: "What a pretty girl, ily!"
often used by 'scene kids' on MySpace, and sites like that
a quick way to show affection, although, often meaningless.
holly: gtg bye xxxxx
izzy: ily xxxxx
hiya, hope you had a good day, seee you soon, ily x