The further you get in towards the middle of the tree (any tree), the more frequent and the larger the knots will be.
That is a function of how trees grow: Lower limbs are dropped (as they no longer are get enough sunlight). At the same time the tree grows in diameter by adding wood to the outside of the log each year.
So, even if the wood is sound, there may not be any quality boards coming out of it.
Having said that...if you paid them to saw it, they could have sawn it and given you the junk wood. But maybe they have had too many people that balk at paying for that so they just send it to the pallet mill or chipper as part of regular business. Either way, that should have been communicated up front.
Like LeafyLady said, the outter inch (or two+) is sapwood and that is generally less desirable than heartwood.
Put my comments and LeafyLady's together, and you begin to understand that the best wood in a log is under the sapwood, but outside of the inner core, so that often means there is not as much as you'd hope for (if you've never seen a log sawn before) - even out of a nice log.