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The FE-170 is not equipt with microphone for sound with video. Sorry. The only fix is to buy a different camera.Some with sound are:Olympus FE-190, FE-230, most Stylus brands and newer FE model cameras.
I had the same exact problem.The lens is not extending out fully or correctly, probably has broken or damaged gear or gears and needs to be replaced. Expensive repair done by Olympus. It is a very tricky and fragile repair on your own, requiring micro screwdrivers and soldering tool. I replaced my own lens but it was hard to find one.