I have a few .mkv files with h.264 video inside of them with chapter makers. Basically this is what happens.
Lets say that chapter one is 0:00 - 4:59, chapter 2 is 5:00 to 9:59, and so on.
If i were to hit play at the beginning and watch all the way into the 2nd chapter and hit the "next chapter" button, no matter where I am in the playback it will skip back to the 5:00 mark, no matter how far into the movie I am in.
For instance if I were on chapter 20, and as long as I haven't hit "next chapter" yet, once I hit the button it will skip the beginning of the chapter.
I'm running vlc 1.0.5 on Windows Vista
Sorry if I wasn't concise enough.