We're using HelpStudio from Innovasys (www.innovasys.com) for writing and building the CHM files. There are many tools on the market for preparing CHM files, but we're using HelpStudio as it can output CHMs, MS Help 2 (for Visual Studio integration), HTML and PDF files. In addition it works together with another Innovasys product - Document! X, which we use to generate the API reference in our help files. I hope this answers your question.
the Telerik team