The position of the paddles is determined by an analog circuit. Here is the circuit for paddle 1. The paddle is a 5K potentiometer that controls the delay time of a 555 timer configured as a one-shot. This one-shot is triggered at the end of every frame (when 256V goes low), and when the delay has expired, that determines the vertical position of the top of paddle 1. The larger the potentiometer resistance, the shorter the delay, and the further up on the screen the paddle will be.

When the 555 fires, it brings VPAD1 low, and a counter starts counting horizontal lines. When it reaches 15 (starting from 0), it brings VPAD1 high again. So, a paddle is 15 vertical lines high.

A second potentiometer, "Paddle 1 Control" is used to calibrate the circuit so that the paddle's position ranges from the top to the bottom of the screen. The original game had a bug where the paddle wouldn't go to the top of the screen, but there seems to be no issue with that here. Perhaps the trim pot isn't set correctly, or else there the simulation isn't accurate enough to reproduce the bug.

Next: Drawing the Paddles.