The standard answer is that the atom is on a superposition of intact and decayed, so kitty is in a superposition of alive or dead. Only when an observer peeks into the box does a single possibility - alive or dead - become an actuality.
Actually as far as i'm aware there is no standard answer to Schrodinger's cat. Schrodinger himself used this example to demonstrate an apparent absurdity of quantum mechanics. Schrodinger goes on to argue that the only way to resolve the paradox is to appeal to the limits of knowledge itself.

This is essentially the measurement problem:

You have a system like an atom in a superposition of states, when it get's measured it collapses down to a single state.... but if you put both the measuring device and the atom in another box, then they form a new system which is in superposition untill measured... etc. So when does this collapse occur? It looks like you would just end up with more and more superpositions, and yet we observe a definite world.

To clarify, imagine a person in a box, is the person really both alive and dead until measured by another person? and is then the person-person in a box system in all possible states untill measured by a third person... and on and on. This completely jars with our experience of the world around us.

Von Neuman (a mathematician who put quantum mechanics into a riigious mathematical framework) argued that the collapse occurs in the first conscious mind to observe the situation, so our cat is then not superpositioned after all and is really either dead or alive. But most people seem to reject this interpretation as it lacks any formal basis ie. why? how? does consciousness cause the wavefunction to collapse (interesting physicist Roger Penrose tries to answer these questions in his book "The Emperor's New Mind", i have yet to read it but again his arguments do not appeared to have swayed many physicists), and further given are knowledge of evolution is seems to throw into question how you could ever get the first conscious mind.

Most scientists who regularly use QM seem to go along with the view that when stuff gets big superposition collapses, some form of quantum decoherence goes on. Now as far as i know this also runs into problems because supposedly we have managed to place a cation into a superposition, a cation is a negatively charged atom and is small compared to a cat but as far as i know is large enough to mean problems for simple big = collapse views, which is why its sometimes jokingly refered to as Schrodinger's cation.

So that leaves us back at square one, where does the collapse occur? Some people do not even think there is a collapse at all, they think that QM is incomplete that a so called hidden variable model will reveal a hidden layer of determinism and solve all the quantum weirdness once and for all. This view is generally not accepted but I have come across some arguments convincing enough to make me want to read into it further.

The orthodox interpretation was developed by Heinsenberg, Bohr and Pauli but i still do not really know what it really says, i do know it is similar in some ways to the positivist philosophy adopted by people like Hawking that essentially claims talking about how reality "actually is" is meaningless, i think that ties in with what Heisenberg says about his cat paradox its beyond the limits of what is knowable but i'm not sure.