"In bocca al lupo" is the traditional Italian way of saying good luck. Directly translated it means "in the mouth of the wolf", refering to when Romulus and Remus are saved and mothered by a she-wolf (As far as I understand.)

The proper response to "In bocca lupo" is "crepi il lupo" which means - "death to the wolf."

I don't know why you have to respond in this manner, but any other response is considered bad luck. It is also impolite to wish someone "in bocca lupo" before an exam, because it's a sign of "cattivo fortuna" or bad fortune.

At least in Milano, "in bocca al lupo" is the only proper well-wishing to be used before a University exam. To say "Buona fortuna" would bring doom on the examinee.

An alternative, and vastly more unpolite form, is in culo alla balena ("up the whale's ass") whose traditional answer is speriamo che non caghi ("let's hope it does not take a dump")