I created a sample page with Ajax ModalPopupExtender and RadComboBox - on my side controls behave properly and I am able to select item from the RadComboBox with mouse and with arrows.
Please note that at the sample the ZIndex property of RadComboBox is set to value higher than the z-index of the ModalPopupExtender (ZIndex="10000000").
If the issue persists - could you please provide us more details about your implementation and paste here sample working code?
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