In medium saucepan, cook bacon (finely chopped)over medium heat. Stir occasionally until bacon is browned. With slotted spoon, transfer bacon to small bowl. Remove pan from heat and add water.
Bring to a boil over high heat and whisk in grits. Whisk until mixture begins to thicken, then reduce heat to low and gently simmer. Stir occasionally and cook for 25 minutes or until creamy.
Season with pepper and salt. Whisk in 1 cup cheese and 3/4 bacon mixture. Pour into a 2-quart serving dish and top with 1/2 cup cheese and the remaining bacon.