Generally, with hard disk diagnostics, you'll download the diagnostic file as an ISO (it's an exact copy of the disk in a file). Then you'll need a program to burn the ISO image to a CD (so that it's properly laid out on the disk). Once that's done, you'll be able to boot from the CD and the test should launch automatically.
The location of the boot files on the CD is critical, that's why there's a special process to burn the ISO. If you just copy the files to a CD, the boot files won't be in the correct location - and the CD won't be bootable.
Here's a free tool that I like for burning ISO's (this is for XP): http://isorecorder.alexfeinman.com/v2.htm
Once the burn is done, place the CD in the CD drive, turn off the laptop and reboot. When it first starts to reboot, press F10 to get at the boot menu (for Gateways). Then select the CD drive to boot from and let it do it's thing.
The impact of the format and reinstall will be affected if the hard drive is failing - that's why I suggest this test first. You can spend hours reinstalling Windows on a failing hard drive only to have it fail once again.
I can't recall if the Gateway restore disks are bootable or not - but you can use them by pressing F11 at the startup message for recovery. Then the program will demand the restore disk so it can copy files. You can get bootable Windows disks, but it'll cost you - so I'd stick with what the Gateway folks gave you.
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