Yes, that is the reference voltage; Vout with respect to ADJ.so the reference 1.25V is not the same 1.25V that drops from output to adj?
But in order to measure Vref, you need to apply >=3v to the Vin terminal, with Iout >=10mA.
If you really want to get technical about it, the National Semiconductor datasheet is in error, as if Iout is 1.5A and the regulator is near -50°C or 150°C, then National's own specifications are not correct, as they do not agree with the dropout chart. In that case, Vin must be >= 1.3v(max Vref)+2.5v(max dropout) = 3.8v.
However, if 10mA<=Iout<=500mA, and 50°C <= regulator temp <=150°C, then 3v<=Vin<=40v would be OK - as long as the power dissipation was handled.