In a saucepan, bring water to a boil. Slowly whisk in the grits and 1/2 teaspoon salt. Reduce heat; cover and simmer for 5 minutes, stirring occasionally.
In a large bowl, combine grits, sausage and 1-1/2 cups cheese. Beat the eggs and milk; stir into grits mixture. Add the butter, pepper and remaining salt.
Transfer to a greased 13x9-in. baking dish. Bake, uncovered, at 350° until a knife inserted in the center comes out clean, about 1 hour. Sprinkle with remaining cheese; bake 15 minutes longer or until cheese is melted. Let stand for 5 minutes before cutting.
Editor's Note: This casserole can be covered and refrigerated overnight. Remove from the refrigerator 30 minutes before baking. Bake as directed.