You could try both ways, but you should see some improvement with S-video. Nothing huge, but noticeable.
EyeTV 2, which comes with the Hybrid, is great software and will export to iDVD (or, if you have Toast 7 or better, directly to Toast).
If you get the analog to DV converter instead of the hybrid, then, yes, iDVD should recognize it natively. However, it won't be as full-featured as a "real" DV input, because you won't be able to stop, fast forward, or rewind the video source, as you could do with a DV camcorder. But that's no big deal - you'd import the whole tape, then edit it on the Mac. Note that there have been some complaints with cheap DV converters ending up with the audio out of sync with the video. The Dazzle might be fine, but, honestly, I think the $99 Hybrid will do everything you need as well as the more expensive Dazzle, and will actually be usable as a TV tuner afterwards, as opposed the the Dazzle, which seems like it would collect dust.
Of course, this assumes your system meets the Hybrid's requirements. For $150, the
EyeTV250 is a much better deal (unless you want HDTV reception): same input capabilities, hardware encoding (so it doesn't tax your Mac and so it will work with slower/older Macs), and a VCR assistant:
EyeTV 250's easy-to-use VHS Assistant will walk you through the entire process of digitizing your videotape, right through to creating a DVD. The VHS Assistant shows you how to connect the video recorder's outputs, play back the tape, and record it into EyeTV's Archive. From there you can choose to export the file to your iPod, leave it in your EyeTV Archive, or burn a DVD using Roxio's Toast 7 Titanium or iDVD.
If you can spring for the $150, I'd recommend the 250 over the Hybrid. I'd personally steer away from the Dazzle, given your limited needs (a few tapes) and possible syncing problems. Just my opinion, though.