In a double boiler, heat together the milk and chocolate until chocolate is melted.
In a 10x16 inch oven baking bag, combine 1/4 cup sugar, cinnamon and nutmeg. Mix in the bread and nuts.
Beat together the eggs, sugar and vanilla; blend together with chocolate mixture.
Place bag in 1 quart loaf pan; pour chocolate mixture over bread. Close bag with twist tie; make 6 half inch slits on top. Pour water into pan so that water comes up sides of bag, not overflowing.
Bake 50 to 60 minutes or until knife inserted comes out clean. To serve, remove from pan, cut bag away from top and put on plate.