Still feeling the effects from the defections of the "Fantastic Four" and the mild reaction of management to it, but bolstered by the massive success of the VCS in Christmas 1980, the Atari Home division entered 1981 on uneven ground.
The VCS had also found new, hearty competition in Mattel's Intellivision, and for the first time had to compete in the home against a (seemingly) superior console, and on the software front with a third party developer -- Activision. Still, the Home Division continued to produce high quality games for the VCS.
One misstep Atari made in early 1981 would start a trend that would haunt Atari for the rest of its existence: vaporware. In this case, it was vapor-hardware in the form of the Remote Control VCS.
Atari introduced both the Atari 2700 Wireless VCS console and a pair of Remote Control Joysticks for the 2600. Both were announced at the January CES, but only the wireless joysticks ever saw the light of day.
"The units were complete, boxes were manufactured, color dealer flyers were sent out, it appears everything was ready. Apparently during the Quality Assurance testing of the Atari 2700 RC Stella by John Protsman, it turned out that the controllers emitted a signal within a 1000 foot radius. What this meant was the units would cause havoc with other Atari 2700s nearby. Also the controller electronics were based on the design of a garage door opener, so the controllers would have the possibility of causing other remote controlled devices to operate." clxxxvi
- Curt Vendal, Atari historian
As far as games went, the Atari VCS started the year with the March release of the very solid Video Pinball by Bob Smith. Even though playfield did not remotely resemble the Atari coin-op of the same name, the pinball action was decent.
A few other releases made their way to the stores in 1981, significant because they were both programmed by one of Atari's first female game developers, Carla Meninsky. First up was Dodge 'Em, an award-winning maze racer in which the player had to drive around and collect objects (dots) while avoiding computer controlled chase cars. It was an imaginative cross between Indy 500 and Pac-Man.
"For Dodge 'Em I was the centerfold for both Playboy and High Times as being the best game of the year... so I thought I'd really made it." clxxxvii
- Carla Meninsky
Meninsky's second game was the VCS conversion of the Atari coin-op Warlords. While not quite the sizable hits of the year's next releases, both games proved that Meninsky had the programming chops to take on one of the biggest VCS projects for 1982: Star Raiders.
"Even now, where I work I've got a Warlords sign out... from the arcade game, the panel. People go by everyday and they go 'Wow, remember Warlords' and 'Wow, that was a great game.'" clxxxviii
- Carla Meninsky
One of the biggest VCS games of 1981 was released in April. After the success of the licensed coin-op game Space Invaders, Atari began to translate as many of its own coin-op hits to the VCS. Missile Command was one of the first.
Aside from Space Invaders, Missile Command for the VCS became well-known as one of few arcade translations for the platform that were as enjoyable to play as the original coin-op.
Rob Fulop programmed Missile Command as his next project following his "re-imagined" version of Space Invaders for the 8-bit computers.
"I did end up getting some flack for the changes I made (to Space Invaders for the 8-bit) though, not via management, but from my peers. Such is why I ended up making my next project, Missile Command, as faithful a replica to the original coin op, as I possibly could." clxxxix
- Rob Fulop
Missile Command was an amazing success for the VCS, selling millions of copies. It also helped send out the message to consumers that, while there were other system like the Intellivision around, the Atari VCS was the only place you could play true arcade games. However, if that message was merely sent with Missile Command, it was received loud and clear with the year's most significant release for the VCS, Asteroids.
Getting the Asteroids coin-op to fit into a cartridge for the VCS was not an easy task. Brad Stewart, the programmer responsible for the VCS version of Breakout, took on the task, and it was not an easy one. Fitting all the Asteroids graphics and game play into a standard 2K cartridge was impossible. In fact, even a 4K cartridge could not hold it all.
"Asteroids needed the 8K, though. After the game was complete, Bob Smith and I spent some time using every trick we knew to try to get it into 4K, but it just... would... not... fit!" cxc
- Brad Stewart
To get access to 8K, Stewart used a newly devised scheme called bank-switching (originally created for the VCS Basic Programming cartridge) that allowed a programmer to access multiple 4K banks of memory. This was a breakthrough for the VCS.
"The present invention provides a bank switching memory and method for increasing the number of individual address locations that can be addressed in a digital system. The present invention expands the available memory space beyond that capable of being addressed by a conventional addressing having a unique memory location associated with a unique address. Specifically, the invention is used to expand the number of ROM memory locations contained in the game cartridge of a video game system without requiring additional address lines."
- Carl J. Neilson, Bank Switchable Memory System patent, filed May 7, 1981
Bank-switching opened up the VCS to a whole new world of crisper and more elaborate graphics. It made Asteroids possible on the VCS, which in turn would make Atari VCS the need-to-have item for Christmas 1981.
"The ultimate electronics toy won't be found in a toy department. Alongside the TV sets and stereos, merchants are pushing such electronic marvels as Atari's Video Computer System, featuring 18 different games and a price of $169."
- Covey Bean, Daily Oklahoman, December 11, 1981
Going into the Christmas season of 1981, Atari's marketing side was flowering to full bloom. It blasted the airwaves with the biggest television and newspaper marketing push the company had ever put forth.
In all, Atari spent $18 million on TV advertising in 1981, cxci nearly triple what it had spent in 1980. Atari put everything on the line for a huge Christmas in 1981, even going so far as to push its retail customers to make large orders of games that they otherwise would not have purchased, just so they could get their allotment of Atari's hot products.
"Atari, for years, was using the leverage that they had to just screw distributors everywhere. When they had a hot game, they would force distributors to buy copies of the old games that weren't selling anymore, just to get copies of the new game." 
- Howard Scott Warshaw
It was not something that those retailers would soon forget. However, the ill feelings were masked by the massive sales for the VCS. In Q4 of 1981, the Atari division saw $511 million in sales. None was more pleased with the success than Ray Kassar.
""We all go to bed dreaming we'll have the kind of Christmas sell-through that we had this year." cxcii
- Ray Kassar
Atari was a monster-sized company by the end of the year. Total sales in 1981 were $1.1 billion cxciii and Atari owned 70-75% of the total video game market. It had 10,000 employees and sprawled across 50 buildings in the Silicon Valley.
Since the coin-op conversions on the VCS were Atari's point of differentiation and the biggest sellers, Atari had set itself up to dominate the home video game market into the future, by licensing as many hit games as possible to re-make on the VCS. Atari licensed five games, including Pac-Man and Galaxian, from Namco, and six games, including Berzerk, from Stern.
Ray Kassar and the Warner brass had seen their vision all the way through to success. Atari pushed the VCS hardware, then five years old, helping to make it a breakthrough success. They put more money into marketing than had ever been spent to sell a video game, and the fruits of that decision were now readily apparent.
Warner had developed a "take no prisoners" attitude, with the development teams, and the good products still flowed. The sales showed, in every way, that Ray Kassar and Manny Gerard had been proven correct. Bushnell had spent too much effort on technology and engineering, and not enough on marketing. With marketing the dominant force at Atari by 1981, it had become the largest player in the world.