Bring the water to boil in a heavy saucepan. Slowly pour in the grits, stirring constantly to avoid lumps. Add the salt and pepper. Cook, stirring frequently, over low heat until thick and smooth, about 40 minutes. Remove the pan from heat.
Preheat oven to 375 degrees. In a mixing bowl, beat the egg and milk together. Fold the egg mixture into the grits. Add half of the two cheeses and mix well. Pour the grits mixture into an oiled 2 quart baking dish and top with remaining cheese. Bake uncovered for 20-30 minutes or until the top is golden. Remove the dish from the oven and allow to set for 5 minutes before serving. 4-6 servings.