I had the same problem, thinking it needed a new tape, but it was actually just the batteries. I forgot it is not ink based - it is thermal based. It needs lots of power to burn the letters onto the thermal tape, so even though the tape was moving and it sounded like it was working, the thermal head wasn't getting enough power. I changed the six batteries and it is working fine.
hope this helps, even though it's almost a month since you posted it.
I want to than Frank who posted the thing about batteries. My Dymo Letratag (sorry I don't have the model in front of me) was doing the same thing. When the guy at Office Max said it might be the batteries, I thought he was nuts. But I saw Frank's reply, changed to some good batteries and yes, it's printing clearly again. So try that first. That didn't make sense until I read Frank's message.
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The first thing you should do is check the batteries. Because the LetraTag requires heat to generate thermal printing, not ink, the batteries need to be well charged. Also, there is a small brush fitted to the inside of the lid of the cartridge cover, that is for cleaning the print head and roller. Remove it, dampen the felt tip with a little rubbing alcohol, and gently clean the print head and roller. You should find this will improve the print quality 100%
The user guide lists all the error codes and possible solutions.
Error 1 indicates a tape jam or low battery. To resolve, try removing the cassette and clearing the tape or replacing the battery.