What does the lottery do with all the money people spend on tickets?

The breakdown of money depends on your state, you should be able to find that info on your states lottery website or by googling it. In my state this is how the breakdown went for the full year of 2011......

$2,120.8 million dollars - prizes to the players

846.1 million dollars - education, we have a scholarship program funded by the lottery, $748 million dollars of that money was used to fund the scholarship. I believe if a student maintains a B average the can use the scholarship to go to an in-state public university.

230.9 million dollars - retailers commisions

142.5 million dollars - gaming and operating expenses

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They give it to the winner and keep some for themselves, or atleast that is what I have been told... Hope my answer helped. :)