I may have a cleaner solution than executing javascript when the Modal pops. I was able to remove the horizontal bar completely but the vertical toolbar still pops up while the modal. Removing the horizontal bar makes it look much better....
I downloaded the source code for the Ajax Toolkit v1.0.20229 (since I'm on .Net v2.0 still) and simply changed the two lines that set the x and y coordinates of the background. As stated earlier on IE6 those two lines would set the x and y coordinates of the modal background at 2,2 so I simply changed it to 0,0. It is pretty easy once you know where it is.
The lines are located in ModalPopupBehavior.js at 575 and at 583:
I changed 575 from:
this._backgroundElement.style.left = (-backgroundXCoord) + 'px';
to:
this._backgroundElement.style.left = 0 + 'px';
and 583 from:
this._backgroundElement.style.top = (-backgroundYCoord) + 'px';
to:
this._backgroundElement.style.top = 0 + 'px';
Then I recompiled a release version and copied the Ajax Control Toolkit DLL to my project.