Fabrication of reaction-bonded $Al_2O_3$ (RBAO) ceramics using Al-Zn-Mg alloy powder was studied in order to improve traditional RBAO ceramic processing using Al powder. The influence on reaction-bonding and microstructure, as well as on physical and mechanical properties, of the particulate characteristics of the $Al_2O_3$-Al alloy powder mixtures after milling, was revealed. Variation of the particulate characteristics of this $Al_2O_3$-Al alloy powder mixture with milling time was reported previously. To start, the $Al_2O_3$-Al alloy powder mixture was milled, reaction-bonded, post-sintered, and characterized. During reaction-bonding of the $Al_2O_3$-Al alloy powder mixture compacts, oxidation of the Al alloy took place in two stages, that is, there was solid- and liquid-state oxidation of the Al alloy. The solid-state oxidation exhibited strong dependence on the density of surface defects on the Al-alloy particles formed during milling. Higher milling efficiency resulted in less participation of the Al alloy in reaction-bonding. This was because of its consumption by chemical reactions during milling, and subsequent powder handling, and could be rather harmful in the case of over-milling. In contrast to very little dependence of oxidation of the Al alloy on its particle size after milling, the relative density, microstructure, and flexural strength were strongly dependent on particle size after milling (i.e., on milling efficiency). The relative density and 4-point flexural strength of the RBAO ceramics in this study were ~98% and ~365 MPa, respectively, after post-sintering at $1,600^{circ}C$.