Pellet hops are basically ground up & extruded; the hop oils they contain hold them together. You get better utilization (bitterness) from pellets due to the smaller size of the pieces; just like you get better extraction from coffee if it's a finer grind. Some brewers are particular about using whole hops--I believe Deschutes and maybe Sierra Nevada are somewhat religious about this.
As others have pointed out, you probably waste more wort using whole hops because the liquid hold up is larger.
There's some heat generated in the pelletizing process, so there is probably some loss of aroma compounds. However, for storage, pellets probably keep better.