I made a pong game for Playstation 2, and for the AI I basically said that if the ball is above the paddle, move up, if its below, move down. I then limited the maximum speed at which the paddle could move, so the way to beat it was to hit things at quite a sharp diagonal (so that it cant keep up with tracking), or into the corner opposite from it (so that it cant get there in time).
It worked ok. You could basically vary the difficulty by varying the maximum AI paddle speed.
