how do i restore my macbook 7.1 to factory settings?

You can purchase replacement discs from AppleCare. You can use your friend's disc to erase the drive, but the software license permits installation on only one CPU at a time.

Apple Store Customer Service at 1-800-676-2775 or visit online Help for more information.

To contact product and tech support visit online support site.

Prepare Your Mac for Sale

Boot from the OS X Installer Disc One that came with the computer. After the installer loads select your language and click on the Continue button. When the menu bar appears select Disk Utility from the Utilities menu. After DU loads select the startup volume from the left side list then click on the Erase tab. Set the format type to Mac OS Extended (Journaled) then click on the Options button. Select the one pass Zero Data option and click on the OK button. Then click on the Erase button.

Note: You can skip the Zero Data option if you are not concerned about removing sensitive personal data from the hard drive. If you choose to skip this part of the process then it is possible for others to recover data from the hard drive. The Zero Data procedure will prevent others from getting access to your personal information.

This process will take 30 minutes to several hours depending upon the size of the hard drive. After formatting has completed quit DU and return to the installer. Now complete the OS X installation. At the completion of the installation do not restart the computer. Instead just shut it off. The next user will be presented with the Setup Assistant when they turn on the computer just as it would if new out of the box.

You cannot restore the computer as you desire without the installer disc.

It's highly unlikely your friend's disc would install. Grey discs supplied with Macs are machine-specific and only have drivers for the model they shipped with.

It may boot to the disc in order to use Disk Utility, but even that can't be guaranteed.

Edit;

Just to be certain you don't waste time or money - the retail Snow Leopard Disc cannot be used with your Macbook as it shipped with either 10.6.3 or 10.6.4.

The retail disc is 10.6.3, and is likely to be an earlier build than the MB shipped with.