Both are pretty much what we have done in the past, but it seems that if you do that the code tree (Like which files are part of a project) does not get synced, looking at some of the files in .metadata suggests the tree is stored there instead of with the project its self. Our .hgignore currently looks like
http://pastebin.com/D13gKtFq I made it after experimenting with removing everything that looks like user preferences and other rapidly changing, useless files. However, org.eclipse.core.resources seems to be unable to strip down anymore than I already have or the project breaks.
EDIT: DOH! I just found out that you can have Windriver "Use Existing Project" the just a standalone project and it worked great. I guess the org.eclipse.core.resources folder is only like a cache or something. Kinda weird it ignores the project folder if it exists but expects org.eclipse.core.resources. Thank you both!