I guess there are some factors you should take into consideration like the size of your lookup tables and the complexity of your transformations and where your lookup are.

Are your lookup tables on Server S2? I guess they aren't on S1 else you could just do the lookups in a join when creating the data source. If your lookups have large numbers of records or there are many of them I would look to stage the table on the destination server on s2. Then the lookups and data conversions can be done in a single sql statement (if our lookups are on S2) using joins when moving the data from the staging table which will have a big performance advantage over lookups.