Audio is saved as PCM in direct copy mode
A1: Switch to full mode and select audio compression.
A2: Use appropriate input driver for audio (there is option in File->Open dialog and Audio->From other source).
Save video fails with message "Direct stream copy cannot be used with this video stream."
A1: Use appropriate input driver if one exists.
A2: Switch to full mode and use compression.
Support for these features is preserved from original VirtualDub, however it does not fully extend to caching input driver which is default driver in the package. You can change priority back to internal AVI driver or select it manually when opening a file.
How to change input driver: see this link, select different option in "Open using".
Still, these modes should work while using caching input driver with limitations on input format:
Also there is simple tool for fragment extraction available under File->Export->Stream copy.
This can copy both video and audio from single (simple) selection, and save to different container (e.g. mp4) when possible.
What does it mean "simple selection":