Indium tin oxide (ITO) has drawn a great deal of attention due to its potential use as transparent electrodes in organic light emitting diode (OLED) and photovoltaic applications. This work focuses on understanding the role of impurity defects on the electrical conduction and transmittance of ITO. Thin films of ITO with high carrier concentration have been deposited onto polyethylene napthalate (PEN) substrates by electron-beam deposition without introduction of oxygen into the chamber. The influence of air anneals on the electrical and optical properties of ITO/PEN samples can is evaluated in terms of the oxygen content and is explained in terms of changes in the free electron concentrations. Rutherford backscattering spectrometry and X-ray photoelectron spectroscopy analysis were used to determine the oxygen content in the film. A Hall effect measurement is used to determine the dependence of electrical properties on oxygen content. The electrical properties of the ITO films such as carrier concentration, electrical mobility, and resistivity abruptly changes after annealing in the air atmospheres. In addition, optical transmittance is improved from 7 to 71 % and optical band gap changes from 3.18 to 3.25 eV after heat treatment. The optical band gap narrowing behavior is because of impurity band and heavy carrier concentration. Metal impurity clusters form in the films as a result of oxygen deficiency and also generate defects and/or impurity states in the band gap and produces an optical band gap shift by merging of these impurity states and conduction band.