I remember fixing this error on an old PC of mine. It involve a SIMPLE Internet explorer option change but I can no longer find it.
I have this sometimes and what fixes it for me is right clicking the file, then clicking the unblock button.
If this is a .chm file from another machine, it has a NTFS flag set for downloading. Clicking this button clears the flag.
I have no idea why other files work but for some reason, .CHM files are affected... I guess it is to do with the way it caches the html pages.
In addition to the blocking "feature" Wil noted, a few years ago, microsoft released a security update that prevents chm files from executing from remote drives. If thisis your problem, you can copy it locally or lower the restrictions on the Local Intranet zone to allow CHM files to be displayed: