To answer the first part of your question, I would say this to you. If there is a lot of processing between the web service and the iPhone, then perhaps you should have your own backend server that performs this processing before sending it to the iPhone. However, if you just need the data from the web service as it is on the iPhone, just use it directly.
As for the different formats, with a smaller size, the iPhone is always better when it comes to network traffic. Stick to using REST so that you minimize the data you need to transfer from iPhone. As for JSON and XML, it is obvious that JSON is lighter, making it a better candidate for the iPhone as a whole, but if your data requires a more complex presentation than JSON can offer, then go for XML. Do not do SOAP, if you can avoid it at all. It’s just too heavy and drains the iPhone’s battery with many demands.
If you're curious about the details of the architecture and implementation of the data-oriented iPhone app, check out all of Apple’s Core Data documents and tutorials on the iPhone.