In-situ processing of AlN-Al alloy composites by the gas bubbling method was investigated using ammonia as the gaseous precursor in the temperature range of 1373 to 1523 K. The products were characterized using X-ray diffraction, scanning electron microscopy, and energy-dispersive X-ray microanalysis. It was found that in-situ formation of AlN reinforcing particles was feasible by bubbling ammonia through aluminum and aluminum alloy melts. The AlN particles formed in situ were small in size and enriched in the top part of the product formed in the crucible. In comparison with the purified nitrogen bubbling gas, using ammonia as the nitrogen precursor enhanced the formation of AlN. Hydrogen gas generated from the dissociation of ammonia is an effective oxygen getter in the system, which can offset the deleterious effect of oxygen impurities and enhance the formation of AlN. The rate of formation of AlN was controlled by the diffusion of nitrogen atoms in the liquid boundary layer. A kinetic model was developed to describe the rate of formation of AlN, which was in excellent agreement with the experimental results. The influences of various processing variables on the rate of formation of AlN were also investigated. The rate of formation of AlN changed little with the content of silicon in the matrix melt, increased slightly with increase in temperature and decrease in nozzle size, and increased significantly with the increasing gas flow rate.