Due to the age of the 400/800 line of computers, the Atari Home Computer Division decided to introduce a replacement. The new 1200XL was released in 1982 and was housed in a new style case that was created by Regan Cheng of the Atari Industrial Design Group.

The system is known for it's excellent keyboard, some call it the best of the atari 8-bit line of computers. Other notable features where the standard 64kByte RAM, a built in self test, that could test the RAM, sound and keyboard, and re-designed cable ports.

The 1200XL also had some missed opportunities. The PBI expansion connector that was intended for this computer was left of, and the machine relied on the slower serial SIO for peripheral connections. To boot, the +12V pin on the SIO connector was not connected, so only 5V was available for devices. However, some older devices relied on the 12V power and therefore did not work on the 1200XL.

An improved video circuit, the Graphics Television Integrated Adapter, or GTIA, replaced the older CTIA chip and provided more levels of chroma to produce more colorful images. The chroma line was however, not connected to the monitor port, the only device that could make use of it. The arrangement of the joystick and cartridge ports made it difficult to use, to the frustration of consumers.

It is no surprise that the 1200XL did not fare well with consumers due to the problems it had and the very high price point of $599.99. The machine was only manufactured for NTSC, no PAL version was made. The 1200XL did not last long, in 1983, one year after it's introduction, the machine was discontinued.

The Atari machines consist of a 6502 as the main processor, a combination of ANTIC and GTIA chips to provide graphics, and the POKEY chip to handle sound and serial input/output. These support chips are controlled via a series of registers that can be user-controlled via memory load/store instructions running on the 6502. For example, the GTIA uses a series of registers to select colors for the screen; these colors can be changed by inserting the correct values into its registers, which are mapped into the address space that is visible to the 6502. Some of the coprocessors use data stored in RAM, notably ANTIC's display buffer and Display List, as well as GTIA's Player/Missile (sprite) information.

The custom hardware features enable the computers to perform many functions directly in hardware, such as smooth background scrolling, that would need to be done in software in most other computers. Graphics and sound demos were part of Atari's earliest developer information and used as marketing materials with computers running in-store demos.

ANTIC is a microprocessor which processes a sequence of instructions known as a display list. An instruction adds one row of the specified graphics mode to the display. Each mode varies based on whether it represents text or a bitmap, the resolution and number of colors, and its vertical height in scan lines. An instruction also indicates if it contains an interrupt, if fine scrolling is enabled, and optionally where to fetch the display data from memory.

Since each row can be specified individually, the programmer can create displays containing different text or bitmapped graphics modes on one screen, where the data can be fetched from arbitrary, non-sequential memory addresses.

ANTIC reads this display list and the display data using DMA (Direct Memory Access), then translates the result into a pixel data stream representing the playfield text and graphics. This stream then passes to GTIA which applies the playfield colors and incorporates Player/Missile graphics (sprites) for final output to a TV or composite monitor. Once the display list is set-up, the display is generated without any CPU intervention.

There are 15 character and bitmap modes. In low-resolution modes, 2 or 4 colors per display line can be set. In high-resolution mode, one color can be set per line, but the luminance values of the foreground and background can be adjusted. High resolution bitmap mode (320x192 graphics) produces NTSC artifacts which are "tinted" depending on the color values; it was normally impossible to get color with this mode on PAL machines.

For text modes, the character set data is pointed to by a register. It defaults to an address in ROM, but if pointed to RAM then a programmer can create custom characters. Depending on the text mode, this data can be on any 1K or 512 byte boundary. Additional register controls allow flipping all characters upside down and toggling inverse video.

The Color Television Interface Adaptor (CTIA) is the graphics chip originally used in the Atari 400 and 800. It is the successor to the TIA chip of the 1977 Atari VCS. According to Joe Decuir, George McLeod designed the CTIA in 1977. It was replaced with the Graphic Television Interface Adaptor (GTIA) in later revisions of the 400 and 800 and all later 8-bit models. GTIA, also designed by McLeod, adds three new playfield graphics modes to ANTIC which allow more colors than previously available.

The CTIA/GTIA receives Playfield graphics information from ANTIC and applies colors to the pixels from a 128 or 256 color palette depending on the color interpretation mode in effect. CTIA/GTIA also controls Player/Missile Graphics (sprites) including collision detection between players, missiles, and the playfield; display priority for objects; and color/luminance control of all displayed objects. CTIA/GTIA outputs separate digital luminance and chroma signals, which are mixed to form an analog composite video signal.

CTIA/GTIA also reads the joystick triggers and the console keys Option, Select, Start, and operating the keyboard speaker in the Atari 400/800. In later computer models the audio output for the keyboard speaker is mixed with the audio out for transmission to the TV/video monitor.

The third custom support chip, named POKEY, is responsible for reading the keyboard, generating sound and serial communications (in conjunction with the PIA chip (Peripheral Interface Adapter, 6520) commands and IRQs, plus controlling the 4 joystick movements on 400/800 and later RAM banks and/or ROM(OS/BASIC/Self-test) enables for XL/XE lines). It also provides timers, a random number generator (for generating acoustic noise as well as random numbers), and maskable interrupts. POKEY has four semi-independent audio channels, each with its own frequency, noise and volume control. Each 8-bit channel has its own audio control register which select the noise content and volume. For higher sound frequency resolution (quality), two of the audio channels can be combined for more accurate sound (frequency can be defined with 16-bit value instead of usual 8-bit). The name POKEY comes from the words "POtentiometer" and "KEYboard", which are two of the I/O devices that POKEY interfaces with (the potentiometer is the mechanism used by the paddle). The POKEY chip—as well as its dual- and quad-core versions—was used in many Atari coin-op arcade machines of the 1980s, including Centipede and Millipede, Missile Command, Asteroids Deluxe, Major Havoc, and Return of the Jedi.

The FREDDY chip is a 40-pin large scale integrated (LSI) circuit that was found in later model 8-bit Atari computers. It is an address multiplexer used for fast DRAM access and replaces several other chips cutting cost and increasing CPU and ANTIC memory access speeds.

FREDDY Allows the CPU and ANTIC chips to access the DRAM memory independent of each other. The chip was originally designed for the Atari 1400XL and the Atari 1450XLD systems. These systems were never released an FREDDY was then used for the 800XL and the later XE systems.

FREDDY was combined with the C061618MMU in the XL/XE line of Atari's and with the C025953 EMMU for the Atari 130XE computer, due to it's larger memory of 128KByte.

The 6502 is an 8-bit MicroProcessor designed by MOS Technology. The team was led by Chuck Peddle and had also worked on the Motorola 6800. The 6502 is a simplified, but faster and cheaper design than the 6800.

The 6502 was introduced in 1975 and was the cheapest microprocessor on the market. Together with the Zilog Z80, the 6502 helped start the home computer revolution of the 1980s. The 6502 was used in a wide range of devices: the Atari 2600, the 8-bit Atari home computers, the Apple II, the Nintendo Entertainment System, the Commodore 64, the BBC Micro and many others. All used the 6502 or a variation of it.

The 6502 is a 1MHz design, while the 6502A is designed for 2MHz. The 6502A is 100% compatible with the original 6502.

Commodore soon bought MOS Technology, but conitnued to sell the microprocessor to competitors and licensed the design to other manufacturers.