Structural evolution of indium oxide thin films deposited at room temperature by reactive magnetron sputtering and annealing in a reducing atmosphere were investigated. The as deposited indium oxide (In2O3) films showed a dominating randomly oriented nanocrystalline structure of cubic In2O3. The grain size decreased with increasing oxygen concentration in the plasma. Annealing in reducing atmospheres (vacuum, nitrogen and argon), besides improving the crystallinity, led to a partial cubic to rhombohedral phase transition in the indium oxide films. Annealing improved the optical properties of the indium oxide film and shifted the absorption edge to higher energies.