Thermal paste basically is used to fill the cracks between a chip (CPU, RAM module, etc) and the heat sinks. Because no surface can truely be flat (our manufactoing process simply cant do it without skyrocketing the price), we use a pad or paste (Paste is better) to fill in the gaps for better heat transfers. Otherwise, air fills in these gaps, which insulates the CPU and builds up heat. This is bad.
Artic Silver 5 is the best avilable thermal gel.