All right, I'll try to answer your points one by one, to the best of my knowledge.
1- When you install the sensor of your case you should not place it in a location where there's an air current (like near the rear exhaust fan) because it will most likely give you false readings (usually lower than the real ones).
I just thought I'd mention that since you said you installed the case sensor.
2- The thermal paste should preferably be a brand name compound. Many overclockers use Arctic Silver 5 (check this link to know where you can buy it... they have a couple resellers in Brazil): http://www.arcticsilver.com/dealers_...stributors.htm
As for applying any thermal compound you should put a very thin layer to cover ALL the cpu surface. The thinner the better. If it's too thick it will prevent correct heat transfer from the cpu to the heatsink. Check this link (it helped me a lot): http://www.heatsink-guide.com/conten...compound.shtml
3- I still think your idle temps are high. Normally you wouldn't want to exceed 60C during load time. Check this page right from Intel's website about Pentium 4 thermal specifications (hint: scroll down until you see a specs table): http://www.intel.com/cd/channel/rese...ence/99346.htm
4- The Zalman CNPS7700-Cu is compatible with your CPU and it's definitely a good air cooler (just make sure you get the Cu not the AlCu because copper transfers heat faster and better than Aluminum).
What you should check if the compatibility with your mobo. I mean you need to know if the 120mm fan will fit in your system without touching any of the surrounding components. I once tried to install the Big Typhoon on my P5LD2-VM (Mini-ATX mobo) and I couldn't because it hit the PSU.
For more info about the Zalman cooler check this link: http://www.zalman.co.kr/eng/product/...?idx=145&code=
Water cooling is even a better option but it will cost you a lot more and generally requires a bit of expertise for installation (unless it's a pre-connected system like the Thermaltake Silent Water which I plan on buying soon
Check this link for a review on Silent Water: http://www.overclockercafe.com/Revie..._Silent_Water/
Hope I helped !