Yes, it can be not [pa`zhalusta], but something like [pa`zhAləsta] or even [pa`zhAlsta] in fast speech. Don't try to pronounce [u] clearly. This is called reduction - to say it simple, there are so many consonants around U that we don't make an effort to pronounce it clear. That is why maybe it sounds like [i] to you. Don't care too much about such things, just listen to Russian speech more and you will get all our strange ways of pronouncing words like this one. You can try to record your voice and let the native speakers check your pronunciation too.

Just listen: http://ru.forvo.com/search/пожалуйста/ "лу" = "lu" (in pronunciation)

This sound is, of course, not perceived as the 'w' sound by the Russian speakers. But it may come close to it. Speaking of the subtleties, have you heard that there are the dark and the light "L" sounds in English as well? The light one (as in lift) and the dark one (as in well).

I will try to explain although my English is not great. There are two kind of "л" prounanciation.One kind is soft л (followed by я, ю, ё, и, е) in which tongue touches teethridge and another (followed by а, о, у, ы, э) in which tongues touches nothing. In this sense "w" is like "л", but they are not the same. "W" is making with moving of lips. "Л" is making with moving of chin.

I've written about this item in the notebook http://www.italki.com/entry/333626 You may use it in automatic mode!