I solved my own problem. hope this helps others. Ref Windows KB article 2021383 that describes how Windows 7 blocks .chm files from a server connection. I knew this block was part of the previous Server security patch and solved that by using a network user file as a place to copy the .chm file to and then set help to that file.

Now in Windows 7, all network drives apparently are considered a server connection and the .chm files are blocked.

I solved this by comparing the .chm file date on the users c:\temp drive with the one in the applicaiton folder and copying an update if it needs to. So setting the help to a local drive solves the Windows 7 .chm file problem.