There is nothing inherently wrong with building an application, web or otherwise, that employs modal dialogs.
The problem is HOW they are implemented - native javascript windows as others have mentioned have been maligned for years for obvious overuse and bad intentions. I personally found them to be very limiting as well - there's no control to add buttons/etc.
Modal dialogs to be implemented using DIVs and CSS (see YUI) have all the benefits of presenting an interface that users recognize from desktop applications, and won't run afoul of popup blockers. But javascript needs to be enabled.
That said, spawning modal dialogs from other modal dialogs is bad design.