u should DEF use wet sandpaper....
u should also DEF use a flat surface, ideally use a turn table (not for records, a polishing table) and work it from the inside to the outside rotating the HS as you go. start w/ like 800grit and work to 2000 grit.
u'll have a mirror in no time.
i dont really know how much of a performace increase u'll notice, though... with 99% silver thermal paste (AS-5), u'r pretty much covered as far as contact is concerned. and think about it... if your HS is 'perfectly' smooth, your CPU is still just as rough (WAY rougher than your HS before you lapped it) so what are u helping here?
i wouldnt mess with it unless u've got the right equipment, its too easy to lap one side better than the other (ever had a chair w/ one leg alil shorter than the rest? same kind of thing here). having a HS that is level on the bottom is actually MORE important than it being smooth.
more power to u though! good luck!