It really depends on your team. Where I work, we keep documentation in a wiki which is linked in with our team website. For the purposes of shipping documentation, the wiki can be exported and we run it through a parser that "fancifies" the look and feel of the documentation for customer purposes.
Storing the documentation with the code (typically in your source repository) is not a bad idea. Just make sure to keep them separated. For example, keep a docs folder which is on the same level with your src folder in your repository. This way, you can quickly ship the current documentation, you can easily track revisions, and anybody new to the project can immediately jump in without having to go to multiple locations for information.