No way; I worked for him from 1978-1986, and never heard him say a naughty word. Also, I tagged along when he went to Apple to meet Jobs, who wanted to show him a late prototype of the Mac, and don’t recall hearing any such thing at the time (and it would have shocked me).
I've also heard that story with several different people in the place of Jobs (mid 90's it was almost always Bill Gates, for example), making me believe it to be apocryphal.
Also, it seems unlike Jobs to be reading algorithm books or to claim so - he was not interested in writing software. Jobs would involve himself in the user-facing functions of software.
Whereas I recall Gates claimed to have read them, or at least some of the volumes, and found them mind-expanding. Gates wrote a fair amount of software himself early on and later would still challenge people on very technical points.
My guess is that this is a paraphrase by Tom Zito using his own speech patterns (and the general style of the Apple group). Since you were there you might remember Don's actual words, or we could always ask him.
The story is 100% veritably folklore. I know this since I've been hearing the story for at least 20 years starring a good half dozen different characters. The fact that is almost certainly not true (and Knuth has denied it) seems quite irrelevant.
