Despite the success of Teddy Ruxpin, WoW filed for bankruptcy in 1988 in the wake of the 1987 stock market crash. The toy line was sold to Playskool, which produced it from the late 1980s to 1996 using the redesign that had been implemented by WoW. This Teddy Ruxpin was smaller and used special cartridges instead of cassette tapes. Unfortunately, this cartridge system proved to be easily damaged.
A normal (non-Teddy) cassette tape is designed for stereo playback with two distinct tracks on each side for the left and right speakers. In contrast, a Teddy Ruxpin cassette uses the two tracks differently: the left track contains the audio, while the right track encodes the toy's movements. A special hole in the top of the cassette tells the teddy bear that the right track contains movement data. This hole is similar to a standard cassette's write protection notch, but closer to the center. If the notch is not present, the player assumes that a normal cassette is being played, and avoids interpreting the right track as movements (which would cause the bear to malfunction, as it is not designed to translate the audio levels in a standard audio book into jaw movements). Normal stereo tape decks use this notch to detect a high bias cassette.
Teddy Ruxpin movement data is encoded as a series of rapid pulse groups known as pulse-position modulation. The data track contains continuous groups of nine pulses separated by silence. The spacing between pulses varies, and the length of each space determines the following characteristics (each of which is assigned to one of the 'time slots' between two of the pulses): position of Teddy's eyes, upper jaw, lower jaw, and (if Grubby is attached) the position of Grubby's eyes, upper jaw and lower jaw. If the cassette is played in a normal cassette player, one would hear both the program recorded on it, as well as a buzzing noise - this buzzing is the pulse-position modulation.
One of the slots is also assigned as a switch to route the audio through Grubby instead of Teddy, and is activated during Grubby's parts of the dialogue. If Grubby is not attached, then the audio plays through Teddy.