CHM files will use Internet Explorer to open up. I had a problem
with chm files not displaying images but I could view text. What I
did was opened Internet Explorer, went to Tools, Internet Options,
then the Advanced tab.
Your problem may lie within one of the sections within the
advanced tab and something is either checked or unchecked.
For me it was the Multimedia section and the Show Pictures
box was unchecked. I checked it and my CHM files would now
display images as well the text. I did get that same strange
message you get but for my image locations.
If IE is not corrupted, I would make note of everything you have
checked in each of the sections ie: Accessibility, Browsing,
Multimedia etc. Then I would experiment with checking/unchecking
until you can open your CHM file again.
I hope something here helps you out!!!!!!!!!!!