CdS nanoparticles with surfaces modified by mercaptoethanol have been synthesized for greater solubility in dimethylformamide (DMF) and the ability to preferentially bind to the poly(ethylene oxide) (PEO) blocks of polystyrene-block-poly(ethylene oxide) (PS-b-PEO) copolymer. The size of the surface-modified CdS nanoparticles (M-CdS) in DMF can be characterized by the Schultz distribution of a mean radius of 18.4 Angstrom and a polydispersity of 0.5, using small-angle X-ray scattering (SAXS). These M-CdS nanoparticles can further disperse in the PS-b-PEO, with a slightly larger mean radius than that observed in DMF. The uptake of M-CdS nanoparticles for the PEO blocks of the PS-b-PEO saturates around 7% in volume fraction. The binding of the nanoparticles promotes a segregation of the PEO/nanoparticles and leads to spherical PEO/M-CdS microdomains in the composite film with a greatly enhanced thermal stability. The structural information obtained from X-ray scattering agrees well with the transmission electron microscopy images and differential scanning calorimetry results.