A high thermal conductive AlN composite coating is attractive in thermal management applications. In this study, AlN-YAG composite coatings were manufactured by atmospheric plasma spraying from two different powders: spray-dried and plasma-treated. The mixture of both AlN and YAG was first mechanically alloyed and then spray-dried to obtain an agglomerated powder. The spray-dried powder was primarily spherical in shape and composed of an agglomerate of primary particles. The decomposition of AlN was pronounced at elevated temperatures due to the porous nature of the spray-dried powder, and was completely eliminated in nitrogen environment. A highly spherical, dense AlN-YAG composite powder was synthesized by plasma alloying and spheroidization (PAS) in an inert gas environment. The AlN-YAG coatings consisted of irregular-shaped, crystalline AlN particles embedded in amorphous YAG phase, indicating solid deposition of AlN and liquid deposition of YAG. The PAS-processed powder produced a lower-porosity and higher-hardness AlN-YAG coating due to a greater degree of melting in the plasma jet, compared to that of the spray-dried powder. The amorphization of the YAG matrix was evidence of melting degree of feedstock powder in flight because a fully molten YAG droplet formed an amorphous phase during splat quenching.