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Photoshop SmartObjects help (longish)

I'm hoping to get some help from the Photoshop pros around here. I'm trying to do a few book cover mock-ups for my portfolio, using this template (the only decent/free one I can find on Google).

Problem is, when I open up the Smart Object for the cover image and make any sort of edit, what normally looks like this:

Suddenly turns into this:

It happens with any sort of edit inside the smart object - including simply making a line of text invisible, or doodling into the background (as I did in the example).

Is it just a problem with the template file, or something intrinsic to the smart object itself that I've missed? I'd be eternally grateful for any insight into why this is happening.

Alternately, if you know of a book cover mock-up template that works (and doesn't come for $60 packaged with a whole bunch of superfluous extras) I will be the most grateful man in the world if you could send a link my way.

Thanks super-much guys.

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