Abstract The accretion disks that fuel active galactic nuclei (AGNs) may house numerous stars and compact objects, formed in situ or captured from nearby star clusters. Embedded neutron stars and black holes may form binaries and eventually merge, emitting gravitational waves detectable by LIGO/VIRGO. AGN disks are a particularly promising environment for the production of high-mass gravitational-wave events involving black holes in the pair-instability mass gap, and may facilitate electromagnetic counterparts to black hole binary mergers. However, many orders of magnitude separate the typical length scales of binary formation and those on which gravitational waves can drive binary inspirals, making binary mergers inside the disk uncertain. Previous hydrodynamical simulations of binaries have either been restricted to two dimensions entirely, or focused on binaries aligned with the midplane of the disk. Herein we present the first three-dimensional, high-resolution, local-shearing-box, inviscid hydrodynamical simulations of disk-embedded binaries over a range of orbital inclinations. We find that retrograde binaries can shrink up to 4 times as quickly as prograde binaries, and that all binaries not perfectly aligned (or anti-aligned) with the AGN disk are driven into alignment. An important consequence of this is that initially retrograde binaries will traverse the inclinations where von Zeipel–Lidov–Kozai oscillations can drive binary eccentricities to large values, potentially facilitating mergers. We also find that interactions with the AGN disk may excite eccentricities in retrograde binaries and cause the orbits of embedded binaries to precess.