Preaht oven to 350 degrees F. Coat the bottom and sides of a 1-quart casserole dish with non-stick cooking spray.
Place pearl onions in a large saucepan and add enough water to cover them. Bring to boil. Then reduce heat and simmer 6 to 8 minutes or until onions are just tender. Drain well and set aside. (see note)
Melt 2 tablespoons butter in a heavy saucepan over low heat. Add flour, and whisk until smooth. Cook for 1 minute, stirring constantly. Gradually add half-and-half while whisking constantly to prevent lumps. Cook over medium heat, stirring frequently until thickened.
Add salt, pepper, mustard, and nutmeg. Add 1 cup shredded cheese; stir until cheese melts. Remove from heat, and gently stir in drained onions.
Pour onion mixture into prepared baking dish. Sprinkle top with remaining 1/2 cup shredded cheese.
Pulse bread slices in a food processor to make 1 1/4 cups breadcrumbs. Toss breadcrumbs with melted butter and thyme until crumbs are well coated. Sprinkle evenly over cheese.
Bake uncovered for 25 to 30 minutes or until thoroughly heated and top is golden. Remove from oven and serve warm.
Notes
I usually use two 10-ounce packages of frozen pearl onions that have been thawed for this recipe. To cook the onions, simmer them on the stovetop in water for 3 to 4 minutes until just until the onions are tender.