Vaughan joined the Canaries last summer, but fell down the pecking order at Carrow Road due to a number of injuries.
"He is a different type of striker to the ones we currently have and crucially he has plenty of pace," said Grayson.
"He is a determined character with a high work-rate and he is a player with something to prove.He has had some problems with injuries in the past but he has had a good pre-season behind him and comes to us fully fit.
"We have agreed a sensible deal with Norwich to protect us and I look forward to working with James over the coming months."
Vaughan remains the youngest goalscorer in Premier League history for scoring for Everton against Crystal Palace in 2005, aged just 16 years and 271 days.