If you've moved not just user files, but entire user profiles, upgrade is not possible. To answer your questions:
1. Technically, nothing is formatted. Your old files are moved to a temp folder, then moved back after Windows is installed (and eventually, C:\windows.old contains old OS and user files).
2. I don't know what registry change you're talking about, but Windows Easy Transfer (migwiz) is your best friend. If you want to keep program settings, make sure to read my post about it.
One catch is that unlike files, settings can't be transferred between OS with different languages. You can check the language with this PowerShell command:
1033 is English.