For various reasons, the waterstones should ALWAYS be used with water. Most of them should be soaked in water permanently or at least a quarter hour before use. Others, such as the finishing stones (#4000 and above) and all Shapton stones need wetting (wetting means holding them under the faucet....not just sprinkling a few drops on them) only right before use. As a matter of fact they should never be stored in water.
The grid number referes to a freshly exposed surface, so #8000 grid will never be coarser than #8000, however, you can grade it finer in two ways. You can let a natural slurry build up, the slurry consists of particles that were already exposed to the grinding process. The grinding of the knife tends to break down and crack the abbrasive particles which makes them finer (this is happening on all abrasives, not only waterstones, but on waterstones you can get such a slurry most easily). It is also common to use a Nagura stone, which is a relatively soft, very fine, chaulky stones. Rubbing a Nagura stone on a finishing stone will build up a slurry and also temporarily embed Nagura particles in the stone surface, effectively grading the stone finer than its rating. On all but the finishing stones, you would flush the slurry away as it slows down the sharpening process somewhat until you are ready to transition to the next grid. Then you let the slurry build up, which makes your work easier on the next grid up, as you have less to polish. On the finishing stone however, removal of material is not your prime concern, polishing is. On the finishing stone you always work with a slurry.
I've also heard the Razor Edge guys may not be accurate in stating you get a better edge using the stone dry. It sounds like most people agree that building up a slurry which results in a smoother and smoother surface will get you a more polished edge. 