Umm, the story's set in a penal colony…
OK, we knew you wouldn't let us get away that easy. Although "In the Penal Colony" is set in a penal colony, you can ask some questions that make the title more interesting. First, what is the penal colony, anyway? Secondly, who, or what, is in it?
The most obvious answers are that the penal colony is just...a penal colony (even though we don't know much yet about it), and that the people who are in it are prisoners. More likely, the "in" could refer to the explorer, who's visiting the penal colony and whose experience there is so strange and traumatic. But that's not the only way to answer the questions.
A lot of people are tempted to read the penal colony as a metaphor or allegory for something else. It is a very non-specific setting (see "Setting" for more on this), and just vague enough that it almost cries out for you to make something out of it. Part of it's just that nasty little "the" – it's not "in a penal colony." So any old penal colony won't do, it's "in the penal colony."
That might make you think: "Whoa, the penal colony has got to mean something profound. Maybe the penal colony actually symbolizes the whole world, a world filled with guilty people. Or maybe it's a metaphor for some kind of brutal, ritualistic religious society." And once you start thinking this way – and you nearly always can with Kafka – you might start to wonder things like, "Man, could we all be in the penal colony?"
So yes, you can run wild with the title – after reading the "Symbols, Images, Allegory" section, that is. Part of the fun of Kafka is that he can lead in so many different directions. But we do recommend that you try and avoid making symbols or allegories out of everything in the story until you've tried to take it at face value for a while, which often raises a whole bunch of questions you might otherwise overlook. Anyway, a number of critics don't think Kafka's meant to be read in any allegorical way at all; those folks would prefer that we read the title obviously, as we did at first, in the "Duh, it's set in a penal colony" way.