A series of observations of polymer sheathing in multiwalled carbon nanotube (MWCNT)-polycarbonate composites are presented. This sheathing was observed in images of the composite fracture surface and is consistent with diameter distributions of the as-received and embedded MWCNTs. A novel nanomanipulation experiment, where the sheathing balls up when contacted by an AFM tip, confirms this phenomenon. This sheathing layer is direct evidence of substantial MWCNT-polymer interaction and will influence the mechanical properties of MWCNT-polymer composites.