[adriand]

It's not used in place of "very", it means "somewhat" or "mostly". "Pretty good" means not all good but not all bad either. If a server at a restaurant asks you, "How is your meal?" and you respond, "Pretty good", you should be prepared to have them ask, "What's wrong with it?"

[glomph]

I think this varies a lot depending on which english speaking communities you are in and your tone of voice.

Personally I often say something was pretty good and mean it as quite high praise or at least better than I expected. I think (hope) my tone of voice would make that apparent though.

[RogerL]

Same here. I grew up in New England, where I think this usage is pretty common. People delight in giving me grief "you are only 'pretty happy'? Shouldn't you be happy...."