How do you use the the built in camera on the sony vaio as a web-cam, the model is vgn-fz260e.

Try this original driver from Sony AsiaAsia maby it will fixit
Apllicable Models
VGN-CR11GH, VGN-CR11SH, VGN-CR12GH, VGN-CR13G, VGN-CR13M, VGN-CR13S, VGN-CR14GN, VGN-CR15G

1. Download the Camera.EXE file to a temporary or download directory (please note this directory for reference).

2. Go to the directory where the file was downloaded and double-click the Camera.EXE file to begin the installation.

3. Follow the installation wizard that appears.

4. At the License Agreement dialog, read the agreement. Click I Agree to continue with the installation.

NOTE: Several setup boxes may briefly appear during the installation. Follow the installation wizard that appears.

5. When the installation finishes, please restart the computer if needed.

http://download.sony-asia.com/vaio/downloads/Original_Drivers/072Q/ENG/VGN-CR1/Drivers/Camera.EXE

Try installing the latest WEB cam driver.
You can download the cam and device drivers from the Sony WEB site.
Select your model notebook and the Windows drivers you require. Please click on this link to the Sony support WEB site :-
http://esupport.sony.com/US/perl/select-system.pl?PRODTYPE=1,24,72&DIRECTOR=DRIVER

Here is the installer for you're Sony Vaio Laptop Web Cam just click the link: http://esupport.sony.com/US/perl/swu-download.pl?mdl=VGNCR506EJ&upd_id=5051&os_id=42

Click on the below link and select the "Camera Category" to install the camera drivers for the computer. Download and install the 3 driver and its updates available.
http://esupport.sony.com/US/perl/swu-list.pl?mdl=VGNFJ270&SelectOS=27

Please try downloading and installing the Microsoft Update KB931812 and VAIO Camera Capture Utility Update from Sony eSupport Site.

Download the Microsoft Update here

Download the VAIO Camera Capture Utility Update

If the issue persists, please try re-installing the Camera Driver and the Camera Application in the Computer.

Download the Camera Driver

Download the Camera Applications

This should fix the Camera issue.

1. Click Start, All Programs, VAIO Camera Capture Utility and VAIO Camera Capture Utility.
   
   
2. Click here for the instructions to configure Camera with the Skype Application
   

I'm sorry to inform you that Sony does not support Windows XP OS for your Computer. However, if you wish, you can try using any third party software to check for the compatible Drivers online.
The Computer is shipped with Sony® Visual Communication Camera VGP-VCC8 Camera.

This Web page should help, it gives you the software and the step by step instrcutions on how to install it. Sony Visual Communication Camera VGP VCC1 Driver

Worse case scenario the software will be here:

http://esupport.sony.com/US/perl/select-system.pl?DIRECTOR=DRIVER&PRODTYPE=24

http://esupport.sony.com/US/perl/swu-list.pl?mdl=VGNCR220E

There u go, all availble files for Vaio VGN-CR220E and Vista

Good luck