We investigate the dynamics and electromagnetic (EM) signatures of neutron star–neutron star (NS–NS) or neutron star–black hole (NS–BH) merger ejecta that occur in the accretion disk of an active galactic nucleus (AGN). We find that the interaction between ejecta and disk gas leads to important effects on the dynamics and radiation. We show five stages of the ejecta dynamics: gravitational slowing down, coasting, Sedov–Taylor deceleration in the disk, reacceleration after the breakout from the disk surface, and momentum-conserved snowplow phase. Meanwhile, the radiation from the ejecta is so bright that its typical peak luminosity reaches a few times 1043–1044 erg s−1. Since most of the radiation energy has converted from the kinetic energy of merger ejecta, we call such an explosive phenomenon an interacting kilonova (IKN). It should be emphasized that IKNe are very promising, bright EM counterparts to NS–NS/BH–NS merger events in AGN disks. The bright peak luminosity and long rising time (i.e., 10 to 20 days in UV bands, 30 to 50 days in optical bands, and 100 days to hundreds of days in IR bands) allow most survey telescopes to have ample time to detect an IKN. However, the peak brightness, peak time, and evolution pattern of the light curve of an IKN are similar to a superluminous supernova in a galactic nucleus and a tidal disruption event making it difficult to distinguish between them. But it also suggests that IKNe might have been present in recorded AGN transients.