Out of the Grey was released in 1986 as the first studio album after the band was dropped from A&M Records due to disappointing sales after the release of the 1984 album This Is Not the New Dream Syndicate Album......Live!. The band pondered its future and even retired temporarily, while lead singer and songwriter Steve Wynn made a record with Dan Stuart (as Danny & Dusty). The duo's album, Lost Weekend (1985), was produced by Paul B. Cutler, who has also produced The Dream Syndicate's eponymous first EP (1982). Jamming with Cutler, a guitar player, rekindled the desire in Wynn to bring The Dream Syndicate together again. The band reformed after some personnel changes, most notably the replacement of lead guitarist Karl Precoda by Cutler. The band's sound changed also, to a "considerably more aggressive, but simultaneously country-inflected outlook". The "more mainstream" sound, however, did not lead to commercial success.

The response to the album from fans and critics was positive, and after its release the band toured Europe before going on its first American tour in two years. Right after the release of the record, when the band seemed to be "back on track", the label, Big Time Records, folded, to the band's detriment—it went back into inactivity and Wynn played acoustic solo dates for a while.

The album was followed by an EP, 50 in a 25 Zone, which contained additional tracks including Slim Harpo's "Shake Your Hips". Two singles were released from the album: Alice Cooper's "Ballad of Dwight Fry" in mid-1986, and Eric Clapton and Bonnie Bramlett's "Let It Rain" in 1987. The song "Boston" is an homage to Van Morrison; Wynn explained that the song references the time Morrison spent in Boston between the breakup of Them and the start of his solo career.

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