Preheat oven to 350 degree F. Lightly grease a cookie sheet; set aside. In a large mixing bowl beat butter with an electric mixer on medium to high speed for 30 seconds. Add the 1/4 cup Parmesan cheese, garlic, sugar, baking powder, and Italian seasoning. Beat until combined. Beat in egg and milk. Beat in as much flour as you can with the mixer. Using a wooden spoon, stir in remaining flour, pepperoni, red sweet pepper, onion, and parsley.
Knead dough gently until it clings together. Shape dough into two 9x1-1/2-inch rolls. Roll dough rolls in the 2 tablespoons Parmesan cheese to coat. Place rolls on prepared cookie sheet; flatten slightly.
Bake for 20 to 25 minutes or until a wooden toothpick inserted near the center comes out clean. Cool on cookie sheet for 1 hour.
Preheat oven to 325 degree F. Cut each roll crosswise into 3/4-inch-thick slices. Place slices, cut side down, on an ungreased cookie sheet. Bake for 10 minutes. Turn and bake for 10 to 12 minutes more or until biscotti are dry and crisp. (Do not overbake.) Transfer biscotti to a wire rack; let cool. Makes about 24 biscotti.