This is **not** a bug.

The $PS1 variable is set when sh / bash are started as interactive
shells (that is shells that allow the user to enter commands and view
the output). So the test checks whether the shell is interactive and if
it is executes code that is intended for interactive shells only.

So the logi is correct. If you want to customise PS1, do it inside the
if part of the conditional.

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https://bugs.launchpad.net/bugs/497765

Title:
  Karmic does not set PS1 correctly in /etc/profile

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