Yes, when Windows deletes files it does not zero out the space that the files occupy, but it just tombstones the entry in the MFT. Unless a "non-quick" format is selected during install, drive space is not zeroed out during reformatting. It's possible to run recovery or undelete utilities which may turn up old deleted files or traces thereof.
I'm assuming by "factory reset" you are talking about the Reset option in the Update and Recovery menu described here.
You should first, make sure all your data is backed up to an external device. Then make sure all data is deleted and the Recycle bin is emptied. Then, run Sysinternal's SDelete or a similar tool (such as the "Drive Wipe" option in CCleaner). This should render any deleted files unrecoverable. You can then proceed with the reset. If you are extra paranoid, run one of these utilities after the reset, and perform another reset.
This shouldn't change your version of Windows. Windows 8 OEM versions get the key from the BIOS so it's nothing you have to worry about.
I don't know the exact details of how the rest works, but it's likely it depends on a recovery partition on your system, so don't use something like DBAN which might erase that.