"your files and applications are maintained on the computer and do not need to be reinstalled"
"Migrate means that you save files and settings in a safe location, such as on a USB drive or a network share, prior to installing Windows 7 on your computer. When the installation is complete, you can move the files and settings from the safe location to the computer running Windows 7."
"The Upgrade option is available in Windows 7 Setup for some computers running Windows Vista®, but it is not available for Windows XP."
- Transfer you data and settings to a secondary storage (probably a USB drive)
- Format the machine
- Install Windows 8,
- Re-install your applications (or install the upgrades)
- Re-apply your settings.