Lapping simply refers to sanding something flat. In the case of heatsinks, you will want to sand the contact area flat so that there are no gaps between the processor and the heatsink. When there are gaps between the core and the heatsink, the heat must travel through the air. Air is a very poor medium for heat transfer. The flatter you can get the heatsink, the fewer gaps there will be, and the more contact you will have between heatsink/processor (lower temps).
As for how to do it, I recommend you search for a tutorial off of this site, or off of a search engine. They will have pretty pictures that I can't describe in this post.
Oh yeah, and if you can get your hands on some, I prefer to use lapping compound instead of sandpaper (at least for the final grit). Sandpaper shifts around too damn much, and it annoys the hell out of me. Lapping compound costs about $17 at machine shops.