P: Smart Objects: Auto-convert JPGs to PSD

4. make a change to the file (You must add a layer)

Then you'll see the problem that Edward is seeing. This is a long-standing workflow problem with creating a smart object from a non-layered file type and wanting to add layers.

I have not - I will now

Also works correctly here.

Guessing that's CS5.
Are you sure you've installed all the updates for Photoshop?

It does the same thing with my work colleague though 😕😕
Tried it with PNG?

That's the exact workflow I used (except I used a TIFF originally, I double-checked with a JPEG). It works correctly for me. I go to File>Save, no save dialog, the changes are saved, and now viewable back in the New PSD (what I previously referred to as the "original file").

Sounds like Photoshop is acting up on you. You many want to try resetting the preferences and trying again.

These are the steps to replicate my problem.
1- Create new PSD file
2- in Preferences > General, enable Place or Drag Raster Images as Smart Objects
3- drag a JPG from finder into the newly created PSD file (it should make it into a smart object)
4- double click on smart object and it'll open up the JPG - make any changes to it and try to Save. It'll bring up the file path dialog for me.

When working on a Smart Object (by double-clicking its thumbnail in the Layers panel or by going to Layer>Smart Objects>Edit Content) do not use the File>Save As command when you are finished. This will create a copy (Save As always creates a copy) of your smart object. The saved edits will then be in a new file that is not a smart object in your original file. Always use the Save command, you should not see a dialog asking where to save the file at all (smart objects are not separate files, they are embedded in your original file but become a file in your Temp folder when you open them for editing).