In versions before CS6, instead of doing a timeline/keyframe animation to animate transformations (the 'transform' option does not appear for smart objects), you can use an option called 'Tweening' to more quickly create layered/frame animations.
You do not convert the layers to smart objects, and you have to have one layer for every frame of animation. The more 'smooth' your animation is the more tedious it is to animate (have to turn layers on and off for each frame to simulate objects moving and changing).
At the bottom of the animation timeline, when you are in the layered/frame mode there will be a button that looks like a series of circles, which is the 'tween animation' button.
First -Select the first frame and choose a 'delay time' - this will determine how smooth each frame of the animation will be between layers.
Next, you add how many frames you want between each layer (I've already done this here, so there are lots of 0.1 second frames of the same layer which slowly become the next layer).
Choose parameters for how the 'tweening' should work (e.g will it affect all layers, or just the ones you have selected). Once you click OK all of the extra frames will be added between each layer.