Preheat oven to 350. Butter two 6-cup souffle dishes. Bring milk, 3 cups water and salt to simmer in large saucepan. Gradually whisk in grits. Cook until thickened, stirring constantly, about 10 minutes. Remove from heat. Add butter; stir until melted. Cool slightly. Whisk egg yolks to blend in small bowl. Add to grits. Whisk in shallots, 1 cup Parmesan and pepper. Beat egg whites in large bowl until stiff but not dry. Fold whites into grits in 3 additions. Divide between souffle dishes.
Bake grits 30 minutes. Sprinkle with 1/4 cup Parmesan, dividing equally. Continue baking until grits are puffed, brown and set in center, about 30 minutes longer.