One can evolve a chao into a Hero Chao by feeding them Hero Fruit, and raise that Chao with Sonic, Tails, and/or Knuckles. Once they go into their first cocoon, the Chao will be a Hero Chao. The only way to get Hero Fruit, without cheats, is to buy them at the Chao Kindergarten's Black Market (only available in Sonic Adventure 2: Battle and Sonic Adventure DX).
One can evolve a Hero Chao into a Hero Chaos Chao, also known as an Angel Chao. To get this kind, a chao must be a Hero Chao, and has gone through two reincarnations already. This means one must first let the chao die twice and be reborn. Chao will usually be reborn if they were treated nicely. Once the Chao is on its third life they'll have to receive at least one of all the small animals (which can be found in the game's stages, except for Route 101, and Route 280 before the Chao has evolved to the second stage of its third life.