Just compiled MacVim with homebrew. Here's what it looks like when I :sh and then type ls:
http://cloud.jtmkrueger.com/image/2N0S0T3k3l1J
As you can see, it's just character codes.
UPDATE
I run oh-my-zsh
Tried installing the plugin named here:
http://vim.1045645.n5.nabble.com/ANSI-colors-td1219411.html
Didn't seem to help
ANOTHER UPDATE
Upon removing my zsh syntax highlighting plugin It seems to work ok. Is there a way to turn off zsh plugins when using oh-my-zsh only when it's a vim 'dumb terminal'?
When you do :sh
in GVim or MacVim, you don't get a real terminal emulator.
It's "dumb" and there's no way to make it understand those escape sequences. You better get used to it or ask (with convincing arguments and a ready-made patch) on the vim-dev mailing list.
You might want to try the ConqueTerm plugin which does its best to interpret ANSI sequences, even inside MacVim.
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