Hi and welcome to the forum.
First of all, the reason why there's an iframe there now is simply to fix a problem in IE when you have a div over a select box. By adding an iframe behind the div, you prevent the select box from showing.
I guess there are both advantages and disadvantages of using a div instead of an iframe. With div, you have the option of adding static text to the modal box, i.e. instead of loading a file from the server. With iframe, you also have to use "parent" all the time if you want to refer to the main document.
If you have a form inside a modal dialog box, I will recommend that you also have <form> tags in that file. That should prevent the problem of conflicting input names.
When I first created this script, I didn't think about using iframes. To me, divs where the obvious choice, but you may be right that I should have thought more about it