Yars' Revenge began development as an Atari 2600 clone of the 1980 Cinematronics arcade game Star Castle. According to designer Howard Scott Warshaw, after he was assigned to the project, he found that a "decent version" of the game could not be made for the console. Instead, he analyzed Star Castle and took "the top logical and geometric components", or "what I thought was fun about it", and reconfigured and modified it to better suit the Atari 2600 as an original game.

The graphics for the Neutral Zone are made up of bits and bytes of the actual program code for Yars' Revenge, laid out vertically, and counter-scrolling over each other. The game's creator Howard Scott Warshaw recalled in an interview with Digital Press that Atari feared showing the game's code on-screen would be a potential copyright violation, but Warshaw explained to them that "besides the scrolling, there was some X-Y and random color processing being done to it" to prevent the raw code from being displayed, stating that "if somebody could get the code from that, then they deserved it!" This same technique was employed by Retro Studios to create static noise textures during the development of the Nintendo GameCube game Metroid Prime.

After killing the Swirl in mid-flight, a black vertical line appears across the spot where the Swirl was shot. This line is referred to under the Helpful Hints section in the game's manual as the "Ghost of Yars" and warns the player to stay off its "mean streak". If the Yar is in the lower third of the screen and the black spot on its back is aligned across the vertical line at the moment the explosion vanishes, the game ends and goes into the "Game Select" screen with "HSWWSH" in place of the player's score. These are the mirrored initials of the game's creator Howard Scott Warshaw.

The fly species in Yars' Revenge, the yar, and their home planet, Razak, are reversals of then-Atari CEO Ray Kassar's name. Creator Howard Scott Warshaw told a marketing executive this was the name's origin, but did not inform them that Kassar was unaware of the name's origins, leading them to believe the name was coined by Kassar and preventing them from informing him and getting the name changed.