Not sure that it's a question of legality as EULAs have not been fully tested by the courts. But Apple does require you to use The Mac Box Set.
Basically, the $29 upgrade is intended for people that bought Leopard (10.5), because 10.6 was not really a "feature" release, but more of a performance refinement. So, Apple's intent was to encourage all Leopard owners to make the jump to Snow Leopard by keeping the price low.
There's another important consideration here and that's the iLife suite. If you're still on 10.4, you've likely got an ancient version of iLife (as well as other apps that are quite old and may be incompatible). So, my recommendation is to do the Box Set and get completely up-to-speed with a clean install - and as a side benefit, you'll get iWork as well.
Do shop around for the Mac Box Set. Companies like Amazon sell it for as low as $120, which is less than the typical OS X update (which usually runs around $129 *without* iLife and iWork). But if you're going to do it, do it VERY soon. 10.7 is just around the corner, which likely won't support some of the older Intel machines - and once Apple releases it, 10.6 will quickly disappear from stores. And even if you can upgrade, you can bet that 10.7 will be a full price upgrade.
