[JPMiller]

Personally I believe a large part of your problem was your fan arrangement... the fan on the side of the case needs to be blowing inward, onto the heatsink.
If both are fighting for the same air it creates turbulence that reduces the heatsinks ability to work.
I would turn your fan to blow inwards, (there are arrows on the side to show the way it blows), and lap the bottom of the HSF, (use a flat surface like glass or something to work on...), and apply the thermal compound like Cricket instructed, (I use a credit card edge or similar to spread the compound on the CPU die)
Make sure the back of the computer is away from the wall.
If all else fails you may want to look into flashing your bios to the newest revision, sometimes it reports the wrong temps and that would trip the alarm unnecessarily.