After a huge amount of time and posting the error on the matplotlib project page and python mode page, I found that providing console -matplotlib arguments in ipython.bat would do the trick with matplotlib 1.3.1 and ipython 1.2.0
This is what I have in my iphython.bat
@ python.exe -i D: \ devel \ Python27 \ Scripts \ ipython- script.py console --matplotlib% *
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