Microsoft Security Update 896358 makes it impossible to view CHM files that are stored on a web site file system or network drive (as opposed to CHM files stored on your own computer). The help file will appear, but instead of the topic text you will see an error message "Action canceled". In general, CHM files need to be downloaded from the Internet and actually launched from your local computer. Please reference http://support.microsoft.com/kb/896358 for more details.

In addition, Microsoft also introduced Attachment Manager with Windows XP Service Pack 2 to help protect your computer from unsafe attachments you might save from the Internet. This tool will actually changes the properties of the CHM file when it is transferred from a web site to your local computer. To allow you local computer to launch the CHM file, users will need right click on the filename and choose Unblock button.

Please reference http://support.microsoft.com/kb/883260 for more details.