But, how does this Memtest work ? I couldnt figure it out.
It boots up first (Before the OS) and runs the program which just writes cycles to your ram and checks for inconsistencies etc.
No, you have to boot from that CD. Daemon Tools will be of no use. Either burn a CD or make a bootable USB stick.
Longshot here but how about taking off the cpu fan again and check if the thermal paste checks out. Did u use enuff or just too much or not enuff ?