Solution 1: Burning the ISO of Ubuntu 14.04 and booting the DVD
If you burn the ISO image and boot with the DVD created, you'll be able to perform the upgrade. You just have to select the option for upgrading your current installation of Ubuntu 12.04. Your data will be kept and the setup process will try to reinstall the packages installed (even external ones), if possible (of course), at the end of the install process.
It is even possible to upgrade from a 32-bit edition of Ubuntu 12.04 to a 64-bit edition of Ubuntu 14.04 that way. Of course, in that case, no previous package can be reinstalled...
Of course, it is not booting from the ISO itself (see Solution 2 below).
Solution 2: Using an external disk drive with Virtual CD/DVD feature
If you have an USB external drive with virtual CD/DVD feature (some enclosures like Zalman ZM-VE300 allow that), you'll be able to boot on the ISO image mounted as if it was a real CD/DVD.
If you have an external disk drive, but no Virtual CD/DVD feature built-in, you might be interested by YUMI, MultiSystem or else.
Solution 3: Creating an USB boot disk from the ISO with "Startup Disk Creator"
You can create an USB boot disk from the ISO with "Startup Disk Creator" which is included in Ubuntu by default. Just type "Startup Disk Creator" in the Dash.
Solution 4: Upgrading via Internet [ISO not used in this case]
If you want to upgrade Ubuntu 12.04 to Ubuntu 14.04 without waiting July 2014, you can also use this command line in Terminal:
update-manager -d
However, the ISO won't be used in this case. Everything will directly be downloaded from Ubuntu repositories.
Note
Don't forget to backup your data before performing any upgrade. It's always better to have a backup even if you don't have to use it than having no backup when you really need one ;-)!
Best Answer
The (discussable) best way to do it is to switch to a TTY (Ctrl+Alt+F1) and login.
No enter
sudo do-release-upgrade. Remember to disable all PPA's before trying to upgrade, else the upgrade may fail and your system may become unusable.Have a backup before. The upgrade can always fail and leave you with a broken system.