Lapping means to sand down the heatsink so to remove machine marks. This makes for better contact between it and the processor. Try going like 600,800,1000,1200 sand papper. From 600 to1200. This should smoth the bottom out real nice.
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.
The most common method of lapping involves taping the sandpaper to something totally flat, usually a sheet of glass. You then rub the heatsink on it until the machine marks are gone and it is flat and smooth, working your way to finer grades of sandpaper. After it is lapped it is recommended that you apply some thermal compound to fill in microscopic imperfections that you can not remove by lapping and help transfer the heat to the the sink from the processor. Arctic Silver is the brand considered the best.