I've decided to make a simple, easy to follow write up on how to lap your heatsink to get the most out of it.
To put this whole "lapping" in a nutshell, its basically just a lot of sanding. Lapping your heatsink(s) will create a flatter surface (more surface area), resulting in better heat transfer. Will it reduce your temps several degrees C? Probably not (unless your heatsink is that bad). CPU heatsinks, videocard heatsinks, chipset heatsinks, waterblocks etc... you name it, you can lap it.
Lapping can also be used to take regular finished aluminum, such as what you see with Lian Li cases, and make it in to a polished, mirror finished aluminum, changing the whole look of the part you are working with.
Part I - What you'll need -water sandpaper
For really rough heatsinks, I'd start with 300-400 grit.
For something like a stock AMD heatsink, 600 grit is a good starter.
a hard, flat surface.. a piece of glass is perfect. -water
Water will act as a buffer, allowing you to sand only the areas that are uneven. This will help ensure a flat surface. Wet sanding will help get rid of scratch marks. You can also use a drop of liquid soap on the sandpaper, along with the water, to make the sanding a little easier
-lots of free time
A good lapping will take more than 10 minutes. This could take a couple hours if you really do a nice job.
Part II - Techniques
There are only a few things you need to keep in mind when your sanding
1) tape your sandpaper to a perfectly flat surface, that is hard - like a small piece of glass or mirror
2) sand the surface evenly and do not be impatient!
3) do not apply any pressure when sanding, let the weight of the heatsink/waterblock do the work
4) it can get messy, clean off your sandpaper and heatsink often
5) sand in a circular motion, and every little while, rotate the piece you are sanding about 90 degrees - this will give you the best finish.
6) when you are satisfied with your lapping job, be very sure to clean the heatsink/waterblock very well as it will have lots of minute metal particles all over it from the sanding.
7) once done, you can use a nice metal/aluminum polish to complete the look and give it a mirror like finish - any automotive metal/aluminum polish will do (yes, aluminum polishes work just as well on copper) such as AutoSol, Mother's Mag and Aluminum Polish... and numerous others. This will give it a brilliant shine and finish, but keep in mind, it probably will not do anything to help with cooling, but will give you a big ego and braggin' rights LOL :)
When I lap my heatsinks, this is the process I normally go through
320 grit (if the heatsink is really bad)
600 grit
600 grit wet sand
1200 grit
1200 grit wet sand
1500 grit
1500 grit wet sand
You can go to a higher grit if you want (2000 ftw).
Part III - Pretty Pictures 
^ This is the surface of a stock amd heatsink. Yuck, look at those machine marks!

^Here's a close up of the machine marks. As you can probably guess, that is not the kind of surface you want.

I dry/wet sanded at both 600 and 1200 grit on this heatsink. Probably spent a total of 15-20 minutes on it. That is the result. Don't let the reflection fool you. There is still a lot of room for improvment.

^If I zoom in, you can still somewhat make out the machine marks. Which means I should have spent more time on a lower grit sand paper. When I'm in the mood I'll finish this heatsink and get some nice pics up and such.
And now for a different example, a chipset heatsink.

Stock

1200 Grit Wet Sanded

Polished w/
turtle wax polishing compound. 
Messy hand FTL, but the chipset heatsink looks great
Another great example by leojharris, he used a figure 8 motion for sanding.
Here are some of my (~NortH~) lapping jobs and what the finished product can look like -
In the first 2, I just used a cheap picture from a flyer for the local drag strip here and put the blocks by it so they would reflect the picture - you can see how well it reflects :)
Danger Den A64 TDX waterblock-
Silverprop Fusion HL GPU waterblock-
Asetek HDD waterblock (modded for 1/2" tubing systems)
and these are the Xoxide/NortHWateR Xtreme BGA Heatsinks... they are all lapped and polished to a mirror finish as well -
Xoxide & NorthWater Xtreme BGA Heatsinks (8 pack)
Sure hope this guide helps... if you have any questions or comments... or even additions, let us know.
The Cooling Section Staff (with help from others too)