I took an HTML file from Project Gutenberg -- as is -- and imported it into MobiPocket Creator. This file had the normal HTML Header-1 {h1} tag used for each chapter title.
I clicked on the "Table of Contents" menu entry in MPC and then the "Add a Table of Contents" button. Entered "h1" into the first field in the wizard and clicked the "Update" button.
It looked like this:
And then I clicked the "Build" icon. This is what showed up in MobiPocket Reader:
And the TOC entries all work.
So, the secret is to use a specific HTML tag -- or tag attribute -- at each location in the book that you would like a TOC entry for.