Abstract: Optical properties of Fe/In₂O₃ magnetic granular films (MGF) prepared by using rf-sputtering system were presented. In₂O₃ is a kind of semiconductor material with direct transition band gap, but the transition between bands for Fe/In₂O₃ MGF is indirect. Comparing with the absorption edge of In₂O₃, the absorption edge of Fe/In₂O₃ becomes less steep, the band gaps of MGF decrease monotonously with the increase of volume fraction of Fe grains in the MGF films, and the tail width of localized states becomes wider in concentration range of Fe studied. The decrease of E_opt with concentration of Fe, can be attributed to (1) the non-crystallization of the In₂O₃ mains with the increase of concentration of Fe; (2) the increase of surface states, owing to the increase of the surfaCe area at the interface between magnetic grains and the matrix.