This study presented experimental reports on effects of processing methods (mechanical mixing and ball milling homogenization) on the fracture toughness of as-received and phenylphosphonic acid (PPA) treated halloysite-epoxy composites. It was demonstrated that with halloysite added, the composites held higher fracture toughness value than that of neat epoxy. Large-sized particle clusters occurred during mechanical mixing process can significantly decrease by ball milling homogenization and much more uniform dispersion was obtained in the cured composites. With PPA treatment, the morphology of halloysite changed from nanotubes to nanoplatelets with a substantial increase in the total contact area between halloysite and epoxy, it further enhanced fracture toughness in PPA-treated composites. The fracture toughness mechanisms of each nanocomposite with different processing methods and chemical treatments have been illustrated.