Alumina-zirconia composites containing 12.5 wt % zirconia were prepared from mechanically mixed alumina and zirconia (2 mol % Y2O3) powders through powder metallurgy techniques. The sintered composite samples were aged at 1200 °C for various durations. The microstructure and mechanical properties of sintered and aged samples were determined. These properties were correlated with the amount of t-ZrO2 present. It was found that the amount of t-ZrO2 is decreasing with the aging time. The strength also decreases with the aging time whereas the fracture toughness increases with aging time. The strength reduction is due to the increase in grain size and to the formation of microcracks. The presence of microcracks is responsible for the increase in fracture toughness.