diff --git a/src/components/dialog/dialog.js b/src/components/dialog/dialog.js
index 10bac0de38f..bbfe50909e7 100644
--- a/src/components/dialog/dialog.js
+++ b/src/components/dialog/dialog.js
@@ -481,6 +481,13 @@ function MdDialogProvider($$interimElementProvider) {
         options.restoreScroll = $mdUtil.disableScrollAround(element);
       }
 
+      if (options.popInTarget && options.popInTarget.length) {
+        // Compute and save the target element's bounding rect, so that if the
+        // element is hidden when the dialog closes, we can shrink the dialog
+        // back to the same position it expanded from.
+        options.popInTargetRect = options.popInTarget[0].getBoundingClientRect();
+      }
+
       return dialogPopIn(
         element,
         options.parent,
@@ -551,7 +558,8 @@ function MdDialogProvider($$interimElementProvider) {
       return dialogPopOut(
         element,
         options.parent,
-        options.popInTarget && options.popInTarget.length && options.popInTarget
+        options.popInTarget && options.popInTarget.length && options.popInTarget,
+        options.popInTargetRect
       ).then(function() {
         element.remove();
         options.popInTarget && options.popInTarget.focus();
@@ -644,18 +652,27 @@ function MdDialogProvider($$interimElementProvider) {
       return $mdUtil.transitionEndPromise(dialogEl);
     }
 
-    function dialogPopOut(container, parentElement, clickElement) {
+    function dialogPopOut(container, parentElement, clickElement, initialClickRect) {
       var dialogEl = container.find('md-dialog');
 
       dialogEl.addClass('transition-out').removeClass('transition-in');
-      transformToClickElement(dialogEl, clickElement);
+      transformToClickElement(dialogEl, clickElement, initialClickRect);
 
       return $mdUtil.transitionEndPromise(dialogEl);
     }
 
-    function transformToClickElement(dialogEl, clickElement) {
+    function isPositiveSizeClientRect(rect) {
+      return (rect && rect.width > 0 && rect.height > 0);
+    }
+
+    function transformToClickElement(dialogEl, clickElement, initialClickRect) {
       if (clickElement) {
         var clickRect = clickElement[0].getBoundingClientRect();
+        // If the event target element has zero size, it has probably been hidden.
+        // Use its initial position if available.
+        if (!isPositiveSizeClientRect(clickRect) && isPositiveSizeClientRect(initialClickRect)) {
+          clickRect = initialClickRect;
+        }
         var dialogRect = dialogEl[0].getBoundingClientRect();
 
         var scaleX = Math.min(0.5, clickRect.width / dialogRect.width);
diff --git a/src/components/dialog/dialog.spec.js b/src/components/dialog/dialog.spec.js
index 104556e8d4b..2947211433c 100644
--- a/src/components/dialog/dialog.spec.js
+++ b/src/components/dialog/dialog.spec.js
@@ -413,6 +413,161 @@ describe('$mdDialog', function() {
       expect($document.activeElement).toBe(undefined);
     }));
 
+    /**
+     * Verifies that an element has the expected CSS for its transform property.
+     * Works by creating a new element, setting the expected CSS on that
+     * element, and comparing to the element being tested. This convoluted
+     * approach is needed because if jQuery is installed it can rewrite
+     * 'translate3d' values to equivalent 'matrix' values, for example turning
+     * 'translate3d(240px, 120px, 0px) scale(0.5, 0.5)' into
+     * 'matrix(0.5, 0, 0, 0.5, 240, 120)'.
+     */
+    var verifyTransformCss = function(element, transformAttr, expectedCss) {
+      var testDiv = angular.element('<div>');
+      testDiv.css(transformAttr, expectedCss);
+      expect(element.css(transformAttr)).toBe(testDiv.css(transformAttr));
+    };
+
+    it('should expand from and shrink to targetEvent element', inject(function($mdDialog, $rootScope, $timeout, $mdConstant) {
+      // Create a targetEvent parameter pointing to a fake element with a
+      // defined bounding rectangle.
+      var fakeEvent = {
+        target: {
+          getBoundingClientRect: function() {
+            return {top: 100, left: 200, bottom: 140, right: 280, height: 40, width: 80};
+          }
+        }
+      };
+      var parent = angular.element('<div>');
+      $mdDialog.show({
+        template: '<md-dialog>',
+        parent: parent,
+        targetEvent: fakeEvent,
+        clickOutsideToClose: true
+      });
+      $rootScope.$apply();
+
+      var container = angular.element(parent[0].querySelector('.md-dialog-container'));
+      var dialog = parent.find('md-dialog');
+
+      dialog.triggerHandler('transitionend');
+      $rootScope.$apply();
+
+      // The dialog's bounding rectangle is always zero size and position in
+      // these tests, so the target of the CSS transform should be the midpoint
+      // of the targetEvent element's bounding rect.
+      verifyTransformCss(dialog, $mdConstant.CSS.TRANSFORM,
+          'translate3d(240px, 120px, 0px) scale(0.5, 0.5)');
+
+      // Clear the animation CSS so we can be sure it gets reset.
+      dialog.css($mdConstant.CSS.TRANSFORM, '');
+
+      // When the dialog is closed (here by an outside click), the animation
+      // should shrink to the same point it expanded from.
+      container.triggerHandler({
+        type: 'click',
+        target: container[0]
+      });
+      $timeout.flush();
+
+      verifyTransformCss(dialog, $mdConstant.CSS.TRANSFORM,
+          'translate3d(240px, 120px, 0px) scale(0.5, 0.5)');
+    }));
+
+    it('should shrink to updated targetEvent element location', inject(function($mdDialog, $rootScope, $timeout, $mdConstant) {
+      // Create a targetEvent parameter pointing to a fake element with a
+      // defined bounding rectangle.
+      var fakeEvent = {
+        target: {
+          getBoundingClientRect: function() {
+            return {top: 100, left: 200, bottom: 140, right: 280, height: 40, width: 80};
+          }
+        }
+      };
+
+      var parent = angular.element('<div>');
+      $mdDialog.show({
+        template: '<md-dialog>',
+        parent: parent,
+        targetEvent: fakeEvent,
+        clickOutsideToClose: true
+      });
+      $rootScope.$apply();
+
+      var container = angular.element(parent[0].querySelector('.md-dialog-container'));
+      var dialog = parent.find('md-dialog');
+
+      dialog.triggerHandler('transitionend');
+      $rootScope.$apply();
+
+      verifyTransformCss(dialog, $mdConstant.CSS.TRANSFORM,
+          'translate3d(240px, 120px, 0px) scale(0.5, 0.5)');
+
+      // Simulate the event target element moving on the page. When the dialog
+      // is closed, it should animate to the new midpoint.
+      fakeEvent.target.getBoundingClientRect = function() {
+        return {top: 300, left: 400, bottom: 360, right: 500, height: 60, width: 100};
+      };
+      container.triggerHandler({
+        type: 'click',
+        target: container[0]
+      });
+      $timeout.flush();
+
+      verifyTransformCss(dialog, $mdConstant.CSS.TRANSFORM,
+          'translate3d(450px, 330px, 0px) scale(0.5, 0.5)');
+    }));
+
+    it('should shrink to original targetEvent element location if element is hidden', inject(function($mdDialog, $rootScope, $timeout, $mdConstant) {
+      // Create a targetEvent parameter pointing to a fake element with a
+      // defined bounding rectangle.
+      var fakeEvent = {
+        target: {
+          getBoundingClientRect: function() {
+            return {top: 100, left: 200, bottom: 140, right: 280, height: 40, width: 80};
+          }
+        }
+      };
+
+      var parent = angular.element('<div>');
+      $mdDialog.show({
+        template: '<md-dialog>',
+        parent: parent,
+        targetEvent: fakeEvent,
+        clickOutsideToClose: true
+      });
+      $rootScope.$apply();
+
+      var container = angular.element(parent[0].querySelector('.md-dialog-container'));
+      var dialog = parent.find('md-dialog');
+
+      $timeout.flush();
+      verifyTransformCss(dialog, $mdConstant.CSS.TRANSFORM,
+          'translate3d(240px, 120px, 0px) scale(0.5, 0.5)');
+
+      dialog.triggerHandler('transitionend');
+      $rootScope.$apply();
+
+      // Clear the animation CSS so we can be sure it gets reset.
+      dialog.css($mdConstant.CSS.TRANSFORM, '');
+
+      // Simulate the event target element being hidden, which would cause
+      // getBoundingClientRect() to return a rect with zero position and size.
+      // When the dialog is closed, the animation should shrink to the point
+      // it originally expanded from.
+      fakeEvent.target.getBoundingClientRect = function() {
+        return {top: 0, left: 0, bottom: 0, right: 0, height: 0, width: 0};
+      };
+      container.triggerHandler({
+        type: 'click',
+        target: container[0]
+      });
+      $timeout.flush();
+
+      verifyTransformCss(dialog, $mdConstant.CSS.TRANSFORM,
+          'translate3d(240px, 120px, 0px) scale(0.5, 0.5)');
+    }));
+
     it('should focus the last `md-button` in md-actions open if no `.dialog-close`', inject(function($mdDialog, $rootScope, $document, $timeout, $mdConstant) {
       jasmine.mockElementFocus(this);