In a skillet, saute onion and green pepper in butter until tender. Stir in flour, salt and pepper. Gradually add milk, stirring constantly. Bring to a boil; boil and stir for 2 minutes. Remove from the heat; stir in half of the cheese until melted. Gently stir in potatoes and ham. Cover and cook over low heat for 10 minutes or until heated through, stirring occasionally. Sprinkle with remaining cheese; cover and let stand until cheese melts.
Microwave Directions: In a covered microwave-safe bowl, cook onion, green pepper; gradually stir in milk. Cook on medium for 2-3 minutes or until thickened, stirring occasionally. Stir in half of the cheese; set aside. In a 1-1/2-qt. microwave-safe baking dish, layer half the potatoes, ham and cheese sauce. Repeat layers. Cover and cook on high for 2-3 minutes or until heated through, stirring occasionally. Sprinkle with remaining cheese. Cover and let stand until cheese melts.