Where do I save?

Configure iPhoto preferences so that PS is your editor and let iPhoto trigger PS for you. Depending on what type of editing that you do, there might be a tiny bit more involved but start with that and post back.

iPhoto does not save an extra copy. The edited copy will become the "modified" version. The original file stays safe in the originals file.

However, you should be seeing your changes reflected in the thumbnail. If they are not, I have to ask:

You are clicking "save" - and only save, not "save as" aren't you?

You are not creating layers are you?

This problem was reported in iPhoto 1(!) so try this:
http://docs.info.apple.com/article.html?artnum=61037

I'm not at my Mac right now so I can't experiment. However, I do believe that you can open only four photos at a time. Regarding saving...

If you've done anything that requires layers, you need to flatten the image and save as a jpeg so that it's automatically reflected in iPhoto. (I think that that is not an issue if the original in iPhoto is psd but I've never tried it. I seem to recall that the issue surfaces only when changing the file type.) In any event, if it's important that you retain the layers, you need to save to desktop and re-import into iPhoto as a brand new photo.

That's a bug or limitation to using Photoshop and iPhoto. It only does 4 at a time.

If you edit created a layered file or has Photoshop changing the extension to its psd extension you need to do one of two things:

1 - flatten the image (layered files) and make sure you're saving as a jpg file.
2 - do a Save As to the desktop and then import the edited version as a new file.

Otherwise iPhoto won't know you've edited the file and it will languish in the library folder structure unused.

Do you Twango?

TIP: For insurance against the iPhoto database corruption that many users have experienced I recommend making a backup copy of the Library6.iPhoto database file and keep it current. If problems crop up where iPhoto suddenly can't see any photos or thinks there are no photos in the library, replacing the working Library6.iPhoto file with the backup will often get the library back. By keeping it current I mean backup after each import and/or any serious editing or work on books, slideshows, calendars, cards, etc. That insures that if a problem pops up and you do need to replace the database file, you'll retain all those efforts. It doesn't take long to make the backup and it's good insurance.
I've written an Automator workflow application (requires Tiger), iPhoto dB File Backup, that will copy the selected Library6.iPhoto file from your iPhoto Library folder to the Pictures folder, replacing any previous version of it. You can download it at Toad's Cellar. Be sure to read the Read Me pdf file.

If you 'Save As' then you're creating a new file. So you'll need to import this new file into iPhoto.

Regards

TD