Your code will result in:
Quote:
<nick> *£aughing Out £oud*
<nick> that is funny lol


I will recommend you do it like so:
Code:
on *:input:*:{
  if ((/* !iswm $1) && (!$ctrlenter) && (!$inpaste)) {
    say $replace($1-,lol,*£aughing Out £oud*) | halt
  }
}
This will correctly result in:
Quote:
<nick> that is funny *£aughing Out £oud*