This could get *very* interesting...
So.. I was thinking.. lol

I saw your post and thought the Dragon would have already been in the air.. and that it hadn't moved from the spot it surfaced at... Grim acts before the Dragon.. on Grim's turn, he casts WaterWalk - this shoots him 60 feet up untill he is standing on the water. Grim is now standing next to the ship, and there is a 5 foot square between him and the Dragon..
Question, what size is the Dragon? Is it the same size as Grim - Large? (that's what it looks like on the map?)
Grim still has a move action left, and with this move action he takes a 5 foot step moving next to the Dragon. The Dragon acts on it's turn. If it goes ahead and does what it was going to do, and take off into the air, it will move through Grim's threatened area in the process of doing so (because Grim is Large and has 10 foot reach). Grim gets an attack of opportunity.
Now here's where I'm a bit confused, and where this could possibly get VERY interesting.. and this is from my lack of playing much 3.5 - With Grim's AoO - can he do any of the "attack actions", so instead of attacking the Dragon with his sword, he.. uhm.. uses his AoO to
grapple the dragon?

LMFAO! (Dude, this is SOOOOO frickin hillarious to me in person sitting here - just the ludicrous-ness of GRAPPLING A FRICKIN' DRAGON! lol! Grim isn't really that great at grappling, and it's probably not the best choice of things to do, but I just CAN'T turn down the opportunity! hehe

) This really would depend on if the dragon's size is "Large", because if it was bigger than that, it'd pretty much be a no-go. I looked over the AoO part in the 3.5 handbook, but I couldn't really find anything. I remember in 3.0 you could use your AoO's to do any of the "attack actions" such as trip, disarm, grapple, etc.
Let me know the size of the Dragon and if this is all correct here what I'm thinking.

(Regardless, Grim is still going to cast WaterWalk, shoot to the surface and move next to the Dragon so he can get a regular AoO on it if/when it tries to fly away...I just want to know if it's possible to use an AoO to grapple. Man.. I never really realized Enlarge Person was this fun! Mithran was right - I gotta memorize more of these!

lol!)