I am jealous. A new in box genuine V2!!
Here’s the simple fix. The device has the early firmware; it was initially released as an MTP based device, and the Settings menu doesn’t have the USB Mode option. We can fix that with the latest firmware as Tapeworm mentioned above, version 03.01.16.
You have Windows XP. the original release of XP was bundled without MTP capability, using Windows Media Player 9 series.
Add these two little problems, and “we have a failure to communicate”. First, let’s force the v2 to speak MSC. Turn off your e260v2.
Slide the top mounted HOLD switch to the right, with the orange part showing. Press and hold the << button while plugging in the USB cable. Once the display switches to “connected”, you can release the button. Voila! the device will be recognized as a flash drive. Follow the manual installation instructions in this firmware post. Download and then unzip (decompress) the firmware file e200pa.bin to the root directory of your e200.
To do this, using Windows XP, click on My Computer. This will open a Windows Explorer window. Double click on the SANSA E260 icon, and in the next view, you’ll see a collection of folders. Place the firmware file in the box, but NOT inside any of the folders; this is the Root.
After transfer, at the bottom of the screen, click on the Safely remove icon and Eject the e260. Slide the HOLD switch back to the LEFT (OFF), and unplug. You’re ready! The firmware will install automatically.
Now, you can connect in MSC mode by selecting, on the new machine: Settings . USB Mode > MSC.
Go ahead and update your PC with Windows Media Player 10 to add MTP capability if desired. WiMP 10 is much better than 9, which was shipped with XP. To update, open WiMP 9, click on Help > Check For Updates, or use the Windows Update function in XP, which will locate the new player version for you.