Note: I haven't finished Hero of Dreams, and in fact have only managed to reach the... [counts on fingers]... fifth dungeon's front door. If any of the following assertions about its interpretation of Zelda continuity are counteracted later in the game, please accept my apologies. I agree that it's a remarkable quest, and I'm impressed by its attempts to position itself within the official Zelda storyline. However, I count the following flaws in its interpretation:
It is said in Hero of Dreams that the Hero of Courage "did something that no other hero could" - completely destroy Ganon. Bah, I say! This statement disregards three aspects of the Zelda storyline.
* Firstly, it is stated in Zelda 2 that Ganon, far from being destroyed forever, could be simply restored with a sprinkle of Link's blood on his ashes. This is important when compared to the third aspect.
* Secondly, it rewrites the Hero of Light's defeat of Ganon, which used a silver arrowhead in a manner identical to that of Courage's. I presume this was because the author didn't know how to explain Ganon's reappearance in Legend of Zelda if he was apparantly "completely destroyed" in A Link to the Past.
* Which leads to the third aspect: the ability of Ganon to be revived even after his complete destruction is established in the Oracles (which can be fitted snugly into the continuity just after A Link to the Past - or, at a stretch, after Zelda 2) where a reincarnation of Twinrova temporarily brings back Ganon.
Thus, the logical thing to do is to insert a successful revival of Ganon into the Legend of Zelda backstory, rather than rewrite A Link to the Past's ending such that Ganon somehow survives.
Also: it is asked how the Hero of Light was able to defeat Ganon if Ganon held the full Triforce. The excuse given by HoD is that Ganon "was careless". I don't find this a compelling reason at all. Consider that the Hero of Light had both the Master Sword (which can resist the Triforce's magic) and the Moon Pearl (which can also resist the Triforce's magic.) The combination of both provides a much better (though still not completely airtight) reason why even the holder of the complete Triforce couldn't beat the Hero.
Also, there are inherent (and frankly insoluble) problems in including both the Hero of Winds and the Hero of Light in the same game. You see, the Link to the Past interpretation of the Imprisoning War differs in one important respect from the Ocarina of Time interpretation of the Imprisoning War: in Ocarina of Time, Ganondorf only acquires the Triforce of Power, whereas in A Link to the Past's backstory he acquires the full Triforce.
This, I feel, is evidence enough to believe that halfway through Ocarina of Time the Zelda plotline "forks" away from the continuity set by A Link to the Past toward the continuity that Wind Waker would later pursue. (In fact, I might opine and say that the the battle against evil in which "the Hero of Time did not appear" may be the OoT-WW line's version of the events in A Link to the Past.)
But this, of course, means that the Hero of Light and the Hero of Winds cannot exist in the same history. Oh well.
It doesn't, however, necessarily mean that the Hero of Time is also incompatable with the Hero of Light - A Link to the Past's description simply holds that the Hylian Knights protected the sages, and doesn't eliminate the possibility that the Hero was, or was among, them.
(No, I don't reckon that the storylines of Twilight Princess or any other games are going to come storming in and reunite the forked continuity lines, because it's unequivocal that A Link to the Past's backstory is intended to be the OoT Imprisoning War.)