Comment 4 for bug 328950

That's really beside the point. No, those escape codes will not produce colors in a "dumb" terminal, but that's not really a bug. If you want the escape codes to work and ansi-term offers that feature, I don't see why you don't use ansi-term. If my hunch is correct, there may be a bug here, and that is that color support in ls is not turned off when the terminal type is dumb. It's not a bug in Emacs or in Bash proper, but possibly in the Bash startup files shipped with Ubuntu (if indeed this is reproducible with the default .bashrc etc out of the box).

So: does "unalias ls" fix anything for you?

Wishing for support for color escape codes in M-x shell is a valid feature request but not really a bug, and should probably by brought up with the Emacs upstream maintainer.

I hope I have correctly interpreted your report. Please do follow up and confirm or perhaps clarify. Thanks.