We use a model material of polystyrene blended with surface-modified cadmium selenide nanoparticles to investigate the interaction between polymer molecules and nanoparticles during the process of crazing. We demonstrate that nanoparticles undergo three stages of rearrangement during craze formation and propagation in glassy polymer nanocomposites: (1) alignment along the precraze, (2) expulsion from craze fibrils, and (3) assembly into clusters entrapped between craze fibrils. These results provide insight into the failure mechanisms of glassy polymer nanocomposites.