I was able to quickly reproduce the problem you describe, based on the provided information and code. The problem manifests, when the color picker is initialized in an invisible parent element (an element with "display:none;" style setting). We will fix it for Q3 2010 SP2. For the time being, you can use the following workaround:
Telerik.Web.UI.RadColorPicker.prototype._oldinitializeFields = Telerik.Web.UI.RadColorPicker.prototype._initializeFields;
As you are not using a Telerik control to hide/show the color picker, you will have to call its repaint
method manually as soon as the PopupControlExtender shows the "Panel1" panel. The controls from the RadControls for ASP.NET AJAX suite call this method in such cases internally.
the Telerik team