In my opinion, the actual explanation here is that:
Python evaluates if condition lazily!
And I'll explain:
When you call to
foo(prepare=True)
just like that, nothing happens, although you might expected that bar(x) will be executed 10 times. But what really happen is that 'no-one' demanding the return value of foo(prepare=True) call, so the if is not evaluated, but it might if you use the return value from foo.
In the second call to foo, iterating the return value r, python has to evaluate the return value,and it does, and I'll show that:
Case 1
r = foo(prepare=True)
for x in r:
    pass
The output here is 'ENTER bar' 9 times. This means that bar is executed 9 times.
Case 2
r = foo(prepare=False)
for x in r:
    pass
In this case no 'ENTER bar' is printed, as expected.
To sum everything up, I'll say that:
for example:
# builds a big list and immediately discards it
sum([x*x for x in xrange(2000000)])
vs.
# only keeps one value at a time in memory
sum(x*x for x in xrange(2000000))
About lazy and eager evaluation in python, continue read here.