Personally I'd feel comfortable with the 11 a.m AVE if you're arriving at 7 a.m. But I'm not one that likes to arrive hours in advance and sit around. I think you have enough cushion in your timing to be fine for the 11 a.m. train.

CathyM, thanks. We will be tired/giddy/excited to start our trip so the last thing I want to do is sit around a train station! We will need a few minutes to grab a sandwich and water for the train ride.
Will rush hour be a factor here? Is there a significant time differnce between taking a cab and the express bus? We arrive in T1 so figure the bus will take approx 45 minutes to Atocha.
Thanks again.

I'll let others comment on whether it's a hassle to get from T1 to T4, which will really determine whether this is a good option for you. I always arrive in T4 and have taken the C1 Cercanias (commuter line run by RENFE) to Atocha. It's only 5 stops between Barajas T4 and Atocha, no transfer, clean trains, not crushing crowds like the Metro. Trains run only every half hour but if the timing is good, I think it'd be the quickest (and with AVE tickets, the train from the airport would be free, but I realize that's not a big deal).

You can get the schedule of the Cercanias trains on the RENFE website, so you would have some idea of whether your timing is good once you're through customs.

lreynolds, I had seem the Cercanias option. It seems we need to take a bus to T4 and then find the Cercanias. Is this confusing? my husband is not happy that i am considering anything but a taxi so want to make it easy. I understand the bus will be waiting for us right outside T1 and the last stop is Atocha so it seems pretty easy.

Personally when arriving into T1 and going to Atocha I prefer the bus as it's just outside the terminal and stops at Atocha. However if you're tight on time then a taxi is probably faster - but 2.5x the expense.