Densification and α'/β' phase transformation in the Si-Al-O-N system with $Y_2O_3$ addition have been investigated. The specimens were prepared with initial composition corresponding to substitutional level of z≠0.5 with varying $Y_2O_3$ content. The powder compacts were sintered at 1780℃ for 0 to 4h under 1 atm. $N_2$. The sintering temperature was also varied from 1640℃ to 1830℃ for a constant sintering time of 1h. Sintered density increased with $Y_2O_3$ content and maximum relative density of 97% was obtained in 10 wt% $Y_2O_3$ added specimen. X-ray diffraction analysis showed that the resultant structure of α' and β' in the studied range. The relative amount of α' and β' varied with sintering time, temperature and $Y_2O_3$ addition. β'phase was first obtained from the initial α-$Si_3N_4$ powder in relatively short sintering time. Most of the β'phase was further transformed into α' phase during prolonged sintering. The phase transformation sequence was suggested to be that the alumina react with α-$Si_3N_4$ to form β'-sialon and that the aluminium nitride and the yttria react further with β'-sialon to form α'-sialon. The final fraction of β'-sialon increased with $Y_2O_3$ addition, longer sintering time and higher sintering temperature. The measured microhardness and fracture toughness were explained by the sintered density and microstructure.