SED 7.10.1
Open a file (test.c), make a change and the click the close
SED window "X" button in the upper right corner. A dialog
appears saying "Save changes to....?". If you press "cancel",
SED closes anyway. I believe it should return without closing
SED?

No, cancel just does not save the file. The dialog has 2 buttons only - "No" would be indeed better than "Cancel". I'll put this on my list.

Usually a dialog with 3 options pops up:

yes - save and exit
no - don't save, but exit
cancel - don't exit

well, mine has 3 buttons, yes no and cancel and they are functioning properly
yes - save and exit
no - don't save, but exit
cancel - don't exit