High-quality boron nitride nanotubes (BNNTs) were functionalized for the first time with water-soluble and biocompatible PEGylated phospholipid [methoxy-poly(ethylene glycol)-1,2-distearoyl-sn-glycero-3-phosphoethanolamine-N conjugates (mPEG-DSPE)]. We found that BNNTs can be suspended in water for more than 3 months without precipitation. By comparing the dispersion stability of mPEG-DSPE/BNNTs in various solvents and the related Hansen solubility parameters, we found that polarized and hydrogen bonds between water and the hydrophilic mPEG play important roles in maintaining stable dispersion of BNNTs and preventing aggregation of mPEG-DSPE/BNNTs in the solutions. This has led to the formation of composite films with well-dispersed BNNTs and the coating of self-assembled monolayer (SAM) BNNTs. Furthermore, the lengths of these functionalized BNNTs can be shorterned, for the first time, from >10 μm to ∼500 nm by ultrasonication. Experiments suggest that effective dispersion of BNNT in solution is necessary for such cutting, where effective energy transfer from the sonicator to nanotubes is achieved. Our results will form the basis for stable functionalization, dispersion, and effective cutting of BNNTs with water-soluble and biocompatible PEGylated phospholipid, which are important for biomedical and composite applications.