Ok... fixed it !!!!
Was stupidly putting the form tag outside of the modalPanel when it needs to be inside....
Did you find a workaround to this? Does anyone know of one? I would like to be able to use a picklist in a modal but as per the JIRA it just doesn't work.
damianharvey, if your code the same as in stani21 snippet - check his own comment about forms.
if your forms used in a right way - please add your own smippet. There should be no problems with such composition.