Chitosan nanoparticles and their chemically modified derivatives, especially when integrated with epoxy resins, play a crucial role in significantly enhancing the morphological, mechanical, and thermal stability properties of epoxy-based nanocomposites. These nanoparticles contribute to improved tensile strength, Young’s modulus, toughness, and thermal resistance due to their uniform dispersion and strong interfacial bonding within the polymer matrix. Surface modification of chitosan with functional groups such as polysiloxanes and ammonium phytate promotes the formation of denser char layers during thermal degradation, which substantially increases flame retardancy and overall thermal stability. Incorporating chitosan into epoxy resin systems further enhances thermal stability by facilitating the creation of stronger crosslinked networks and robust molecular bonds, thereby improving resistance to thermal degradation. Achieving optimal nanoparticle distribution while preventing particle agglomeration is essential to maintain a homogeneous composite structure and maximize performance. Furthermore, the natural biological activity, antibacterial effects, and biodegradability of chitosan make it an environmentally friendly and highly suitable material for a wide range of industrial and biomedical applications. This study comprehensively investigates the influence of modified chitosan nanoparticles on the morphology, mechanical strength, thermal stability, and degradation behavior of epoxy nanocomposites. Recent progress in epoxy nanocomposites containing modified nanoparticles is also reviewed, summarizing key findings and emerging trends in this promising field.