Preheat oven to 375º
1. Butter a 3 qt. casserole dish and set aside. Place bread pieces in a Med bowl. In a small saucepan over Med heat, melt 2 T butter. Pour butter over bread and toss. Set bread crumbs aside.
2. Warm milk in saucepan over Med-Low heat (do not boil). Melt remaining butter (6 T) in a high-sided skillet over Med heat - When it bubbles, add flour and cook while stirring for 1 minute.
3. Continue to stir and add warm milk slowly - Stirring will keep the mixture smooth and free of lumps. Continue cooking and whisking constantly until mixture bubbles and starts to thicken, about 8-12 minutes.
4. Remove pan from heat. Stir in salt, nutmeg, peppers and 3 c. of cheddar and 1 c. of second cheese (reserve the rest for topping). Set the cheese sauce aside.
5. Cover a large pot of salter water and bring to a boil. Cook the macaroni until the outside is cooked, but the inside is underdone - Approx 2-3 minutes. Transfer to a colander, drain and rinse with cold running water. Stir macaroni into the cheese sauce.
6. Pour mixture into prepared, greased, baking dish. Sprinkle remaining cheese and bread crumbs over the top. Bake about 30 minutes, until golden and bubbly.
7. Transfer dish to a wire rack for about 5 minutes to cool.