diff --git a/src/components/dialog/dialog.js b/src/components/dialog/dialog.js
index 1cdeb3bcc63..891e53cb4d4 100644
--- a/src/components/dialog/dialog.js
+++ b/src/components/dialog/dialog.js
@@ -489,15 +489,15 @@ function MdDialogProvider($$interimElementProvider) {
      * Remove function for all dialogs
      */
     function onRemove(scope, element, options) {
-      angular.element($document[0].body).removeClass('md-dialog-is-showing');
-
       options.deactivateListeners();
       options.unlockScreenReader();
-      options.hideBackdrop();
 
       return dialogPopOut(element, options)
-        .then(function () {
+        .finally(function () {
+          angular.element($document[0].body).removeClass('md-dialog-is-showing');
+          options.hideBackdrop();
           element.remove();
+
           options.origin.focus();
         });
     }
@@ -531,6 +531,13 @@ function MdDialogProvider($$interimElementProvider) {
      */
     function activateListeners(element, options) {
       var removeListeners = [ ];
+      var smartClose = function() {
+        // Only 'confirm' dialogs have a cancel button... escape/clickOutside will
+        // cancel or fallback to hide.
+        var closeFn =  ( options.$type == 'alert' ) ? $mdDialog.hide : $mdDialog.cancel;
+
+        $mdUtil.nextTick( closeFn, true );
+      };
 
       if (options.escapeToClose) {
         var target = options.parent;
@@ -539,7 +546,7 @@ function MdDialogProvider($$interimElementProvider) {
                 ev.stopPropagation();
                 ev.preventDefault();
 
-                $mdUtil.nextTick($mdDialog.cancel);
+                smartClose();
               }
             };
 
@@ -561,7 +568,7 @@ function MdDialogProvider($$interimElementProvider) {
                 ev.stopPropagation();
                 ev.preventDefault();
 
-                $mdUtil.nextTick($mdDialog.cancel);
+                smartClose();
               }
             };
 
diff --git a/src/components/dialog/dialog.spec.js b/src/components/dialog/dialog.spec.js
index d9e8a9067cc..e24dcf9dea2 100644
--- a/src/components/dialog/dialog.spec.js
+++ b/src/components/dialog/dialog.spec.js
@@ -104,6 +104,40 @@ describe('$mdDialog', function() {
 
       expect($document.activeElement).toBe(parent[0].querySelector('md-dialog-content'));
     }));
+
+    it('should remove `md-dialog-container` on click and remove', inject(function($mdDialog, $rootScope, $timeout) {
+          jasmine.mockElementFocus(this);
+          var container, parent = angular.element('<div>');
+
+          $mdDialog.show(
+            $mdDialog.alert({
+              template:
+                '<md-dialog>' +
+                  '<md-dialog-content tabIndex="0">' +
+                    '<p>Muppets are the best</p>' +
+                  '</md-dialog-content>' +
+                  '</md-dialog>',
+              parent: parent,
+              clickOutsideToClose: true
+            })
+          );
+
+          $rootScope.$apply();
+          triggerTransitionEnd( parent.find('md-dialog') );
+
+          container = angular.element(parent[0].querySelector('.md-dialog-container'));
+          container.triggerHandler({
+            type: 'click',
+            target: container[0]
+          });
+
+          $timeout.flush();
+          triggerTransitionEnd( parent.find('md-dialog') );
+
+          container = angular.element(parent[0].querySelector('.md-dialog-container'));
+          expect(container.length).toBe(0);
+    }));
+
   });
 
   describe('#confirm()', function() {
@@ -167,7 +201,7 @@ describe('$mdDialog', function() {
               '<button class="dialog-close">Close</button>' +
             '</div>' +
             '</md-dialog>',
-        parent: parent
+        parent: parent,
       });
 
       $rootScope.$apply();
@@ -175,6 +209,79 @@ describe('$mdDialog', function() {
 
       expect($document.activeElement).toBe(parent[0].querySelector('.dialog-close'));
     }));
+
+    it('should remove `md-dialog-container` after click outside', inject(function($mdDialog, $rootScope, $timeout) {
+          jasmine.mockElementFocus(this);
+          var container, parent = angular.element('<div>');
+
+          $mdDialog.show(
+            $mdDialog.confirm({
+              template:
+                '<md-dialog>' +
+                  '<md-dialog-content tabIndex="0">' +
+                    '<p>Muppets are the best</p>' +
+                  '</md-dialog-content>' +
+                  '</md-dialog>',
+              parent: parent,
+              clickOutsideToClose: true,
+              ok : 'OK',
+              cancel : 'CANCEL'
+            })
+          );
+
+          $rootScope.$apply();
+          triggerTransitionEnd( parent.find('md-dialog') );
+
+          container = angular.element(parent[0].querySelector('.md-dialog-container'));
+          container.triggerHandler({
+            type: 'click',
+            target: container[0]
+          });
+
+          $timeout.flush();
+          triggerTransitionEnd( parent.find('md-dialog') );
+
+          container = angular.element(parent[0].querySelector('.md-dialog-container'));
+          expect(container.length).toBe(0);
+    }));
+
+    it('should remove `md-dialog-container` after ESCAPE key', inject(function($mdDialog, $rootScope, $timeout, $mdConstant) {
+          jasmine.mockElementFocus(this);
+          var container, parent = angular.element('<div>');
+          var response;
+
+          $mdDialog.show(
+            $mdDialog.confirm({
+              template:
+                '<md-dialog>' +
+                  '<md-dialog-content tabIndex="0">' +
+                    '<p>Muppets are the best</p>' +
+                  '</md-dialog-content>' +
+                  '</md-dialog>',
+              parent: parent,
+              clickOutsideToClose: true,
+              escapeToClose: true,
+              ok : 'OK',
+              cancel : 'CANCEL'
+            })
+          ).catch(function(reason){
+              response = reason;
+          });
+
+          $rootScope.$apply();
+          triggerTransitionEnd( parent.find('md-dialog') );
+
+          parent.triggerHandler({type: 'keyup',
+             keyCode: $mdConstant.KEY_CODE.ESCAPE
+           });
+           $timeout.flush();
+          triggerTransitionEnd( parent.find('md-dialog') );
+
+          container = angular.element(parent[0].querySelector('.md-dialog-container'));
+
+          expect(container.length).toBe(0);
+          expect(response).toBe(false);
+    }));
   });
 
   describe('#build()', function() {
@@ -331,7 +438,11 @@ describe('$mdDialog', function() {
 
       var container = angular.element(parent[0].querySelector('.md-dialog-container'));
 
-      container.triggerHandler('click');
+      container.triggerHandler({
+        type: 'click',
+        target: container[0]
+      });
+
       $timeout.flush();
       $animate.triggerCallbacks();
 
diff --git a/src/core/services/interimElement/interimElement.js b/src/core/services/interimElement/interimElement.js
index 626665a01bc..a3d30db44fe 100644
--- a/src/core/services/interimElement/interimElement.js
+++ b/src/core/services/interimElement/interimElement.js
@@ -258,7 +258,7 @@ function InterimElementProvider() {
        */
       function show(options) {
         if (stack.length) {
-          return service.cancel().then(function() {
+          return service.cancel().finally(function() {
             return show(options);
           });
         } else {
@@ -314,6 +314,7 @@ function InterimElementProvider() {
                   .remove()
                   .then(function() {
                     interimElement.deferred.reject(reason);
+                    return interimElement.deferred.promise;
                   });
       }
 
@@ -417,7 +418,7 @@ function InterimElementProvider() {
               // Trigger onRemoving callback *before* the remove operation starts
               (options.onRemoving || angular.noop)(options.scope, element);
 
-              return $q.when(ret).then(function() {
+              return $q.when(ret).finally(function() {
                 if (!options.preserveScope) options.scope.$destroy();
                 removeDone = true;
               });
diff --git a/src/core/services/interimElement/interimElement.spec.js b/src/core/services/interimElement/interimElement.spec.js
index 4449ae09488..b13f594accc 100644
--- a/src/core/services/interimElement/interimElement.spec.js
+++ b/src/core/services/interimElement/interimElement.spec.js
@@ -46,10 +46,10 @@ describe('$$interimElement service', function() {
     it('should not call onShow or onRemove on failing to load templates', function() {
       createInterimProvider('interimTest');
       inject(function($q, $rootScope, $rootElement, interimTest, $httpBackend, $animate) {
-        $compilerSpy.and.callFake(function() {
-          var deferred = $q.defer();
-          deferred.reject();
-          return deferred.promise;
+        $compilerSpy.and.callFake(function(reason) {
+          return $q(function(resolve,reject){
+            reject(reason || false);
+          });
         });
         $httpBackend.when('GET', '/fail-url.html').respond(500, '');
         var onShowCalled = false, onHideCalled = false;
@@ -59,8 +59,9 @@ describe('$$interimElement service', function() {
           onRemove: function() { onHideCalled = true; }
         });
         $animate.triggerCallbacks();
-        interimTest.hide();
+        interimTest.cancel();
         $animate.triggerCallbacks();
+
         expect(onShowCalled).toBe(false);
         expect(onHideCalled).toBe(false);
       });
@@ -501,13 +502,13 @@ describe('$$interimElement service', function() {
 
       $compilerSpy.and.callFake(function(opts) {
         var el = $compile(opts.template);
-        var deferred = $q.defer();
-        deferred.resolve({
-          link: el,
-          locals: {}
+        return $q(function(resolve){
+          resolve({
+            link: el,
+            locals: {}
+          });
+          !$rootScope.$$phase && $rootScope.$apply();
         });
-        !$rootScope.$$phase && $rootScope.$apply();
-        return deferred.promise;
       });
     });
   }
diff --git a/src/core/util/animate.js b/src/core/util/animate.js
index eab615ea491..aeaa725f92e 100644
--- a/src/core/util/animate.js
+++ b/src/core/util/animate.js
@@ -52,7 +52,7 @@ function AnimateDomUtils($mdUtil, $$rAF, $q, $timeout, $mdConstant) {
      * Announce completion or failure via promise handlers
      */
     waitTransitionEnd: function (element, opts) {
-        var TIMEOUT = 10000; // fallback is 10 secs
+        var TIMEOUT = 3000; // fallback is 3 secs
 
         return $q(function(resolve, reject){
           opts = opts || { };