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Personally, I hate the idea of it. If there needs to be double overlaying, doesn't it mean that something has already went wrong in the IA / wireframes / userflow? Instead of just solving the problem by having another overlay on top, developers should solve the root of the problem. Having double overlay within the same page is worse than having pop ups to me.
But then again, I might be bias, so i'm asking for everyone's opinions on this.
I think in some cases it can actually be helpful because it is clear that whether you press [ok] or [cancel], you will be going back to the previous overlay. Knowing where you'll be taken is important in terms of UI.
I was thinking that in terms of UI, there are many ways to resolve the lack of space or the informing the users where they are at or would be taken to. eg. Collapsible (accordion) panels, tabs, pagination (guided navigation), refresh the current overlay with clear copy/design indication of the current "state"
With AJAX and all the available javascript helper libraries, expanding divs or overlays to cater for more field options are easily achievable these days.
To resort to having an overlay over another overlay seems more to me like the fastest escape route to "oops we forgot that"
File upload, for example, typically has a completely different interface to the current overlay (e.g. message composition). Destroying message composition to show file upload does not seem to be an advantage to me.