Ok, we finally figured this out through trial and error:
To make this work:
- right click on project, click "Force.com/Add Remove Metadata Components"
- go down to custom ojbjects, open that up, make sure all your custom objects are checked, click apply, then say "NO" to dialog
- then right click on src and click "Force.com/Syncronize with Server, find your objects, and click "Apply Server to Project"
- now your files will be local, check them into SVN and you are golden.