Hi Ed,
I have heard this story many times and my feeling is the same as yours.
Certainly I have not seen a didge ever dug out of a termite mound but..?
Digging around a bit I found this article where the assertion is very clear..
Anyone have any more information?
http://www.winchesterstar.com/TheWinchesterStar/031015/Area_didge.asp
the relevant phrase in the text about half way down the page,
"He also said the Aborigines’ original method for making a didgeridoo began with selecting a piece of wood about 5-feet long and burying it in a termite mound.
“The termites would do all the work and hollow it out,” Chris said.
Aborigines would dig the wood from the mound and decorate it with carvings and paintings.
Martin