To improve the demodulated signal-to-noise ratio, SNR, for colored noise environments, we present a new direct-sequence spread-spectrum receiver system, whose construction is based on the concept of Shaped M-sequence Demodulation (SMD). This receiver has the function for shaping the local dispreading-code waveform. This method can modify the frequency transfer function from a received input to the damp-integrated output according to the power spectrum of colored noise added in the transmission process. SMD performs the combined function of a whitening filter and a matched filter, which can be used to implement an optimum receiver. For the case when the additive colored-noise power spectrum is known and the transmission channel is non-band-limited, a design theory is derived that provides the maximum SNR by choosing the best dispreading-code sequence corresponding to a given signature spreading-code sequence. The noise power component produced in the receiver damp-integrated-output is anayzed by introducing the auto-correlation matrix of the additive noise. The SNR performance of systems, one using non-optimized codes and the other using optimized codes, is examined and compared for various noise models. It is verified by analysis and computer simulation that, compared to a conventional system using non-optimized codes, remarkable SNR improvements can be achieved due to the whitening effect acquired without producing inter-symbol interference. In contrast, if a transversal whitening filter is front-ended, it produces inter-frame interference, degrading the SNR performance. The band-limiting effect of the transmission channel is also analyzed, and we confirmed that the codes optimized for the non-band-limited channel can be applied to the band-limited channel with little degradation of SNR. SMD is inherently tolerant of fast-changing noise such as fading, due to its frame-by-frame operation. Considering this function as a general demodulation scheme, it may be called "Local Code Filtering."