I have read that when you install a new processor you need to apply thermal grease to the top of the processor to get a good contact to the heat sink, is this correct

This is the stuff you need http://www.arcticsilver.com/ 

Not essential but it helps alot!

It is correct, however most heatsinks come with thermal tape.

If they have what looks like to be stickum on the bottom of the heatsink you =can= just use that.

However if you are going to use Arctic Silver II, you are going to have to scrape all of that thermal tape off.

Its not fun, but ASII Will yield about a 3 degree celcius drop in temperatures.

Hope this helps
GB