Heating of surface modified Pd70Ag30 alloy nanoparticle pellets in air was conducted and the effect of surface modification on selective oxidation of Pd and surface segregation of Ag on the surface was examined. For unmodified nanoparticles at 250 °C, free Ag was observed because of preferential oxidation of Pd. Modification with stearic acid reduced the degree of oxidation and the amount of free Ag. With polyethylene glycol, the oxidation of Pd was further suppressed. No free Ag was formed on the pellet surface, instead, more segregation of Ag within the alloy nanoparticles to the surface occurred. The effectiveness of these two surfactants gradually diminished at 350 °C.