When the ball bounces off the top or bottom of the screen, VBLANK and VVID are both high at the same time. You can manually bring VBLANK high using the switch near the bottom middle. This causes the ball to switch direction.
When there's a hit, HIT goes high, and then the paddle position relative to the ball is used to control the vertical speed. When 256H is high, meaning the right side of the screen, paddle 2's position is used (D2, C2, B2) and when 256H is low, paddle 1's position is used. The low bit (A1, A2) is not used. The middle of the paddle is 8 (1000) so that results in a value of 10 (the ball doesn't move vertically). The edges of the paddle are 0000 or 1111 so those result in a value of 7 or 13 (the ball moves at maximum vertical speed).
If ATTRACT is high, then the ball moves at maximum vertical speed (7 or 13).