This appears to be related to OS behavior.
The same behavior occurs with a local file:
1. Create a file and save it to the desktop then close the file.
2. Change the file property to "Read-Only".
3. Create a new local file and replace the "Read-Only" file via File -> Save As menu (from AI for example).
On Win 7, the following error message appears: "This file is set to read-only. Try again with a different file name". The "Save As" dialog still shows up until a different file name is chosen.
On Win XP, the following error message appears: "File XXX already exists. Do you want to replace it?" After clicking "OK", the "Save As" dialog can be closed.