It seemed a propitious beginning. In January 1998 the Iranian President, Mr Mohamed Khat ami, reiterated his call for a "dialogue of civilisations" between Islam and the west. In an interview with the US network CNN, he pleaded eloquently for "a crack in this wall of distrust" between the US and Iran.
Throughout the year there were further signs that Iran's isolation was ending. In February, the crowd at Azadi stadium, Tehran, cheered a US flag carried by a US wrestling team. In June, both the US President and Secretary of State called for an end to the "estrangement between our nations". Washington abandoned attempts to punish European companies doing business with Tehran. At an emotional World Cup match on June 21st, Iranian footballers gave flowers and gifts to their US opponents.
Not only did Iran's victory ease much of the bitterness still felt by Iranians towards the US, it also reconciled exiled Iranians with their homeland.
Then in September, the Iranian foreign minister, Mr Kamal Kharazi, announced at the UN that his government would not carry out Ayatollah Khomeini's fatwa against Salman Rushdie.
The declaration was regarded as a turning point, even if Iranian officials had previously said the same thing. The UN was a more prominent forum, and Mr Kharazi distanced the Iranian authorities from the Tehran group who offered $2.5 million to anyone who would murder Mr Rush die. The fact that Britain - not Tehran - gave in by renouncing its demand for an abrogation of the fatwa and a written commitment went unnoticed.
Under Mr Khatami, Iran has also mended its tense relations with Gulf Arab states, and exercised what the US calls a moderating role in Afghanistan. Mr Khatami will visit Paris in February - the first state visit by an Iranian president to a western country since the 1979 revolution.
Judging by the progress in Iran's foreign relations, it would be easy to conclude that the country has relegated the cruel and backward moments of its revolution to the past, but behind the western media images of Mr Khatami's pleasant, smiling face lies a vicious power struggle which the reforming president is not sure of winning.
For every step taken by Mr Khatami, his fundamentalist, anti-western, conservative opponents force him to take one step back. In April, Mr Gholamhossein Karbaschi, the popular mayor of Tehran and a Khatami ally, was arrested and charged with corruption.
When another Khatami ally, the Interior Minister, Mr Abdollah Nouri, came to the mayor's defence, he was fired by the conservative parliament. Mr Kharbaschi has appealed against a religious court's five-year prison sentence and 20-year ban on holding public office.
Mr Karbaschi's downfall showed how little institutional power Mr Khatami holds, with fundamentalists controlling the judiciary, legislature and Pasdaran revolutionary guards.
Under the Iranian system, ultimate authority is held by the Guide (for life) of the Revolution, Ayatollah Ali Akbar Khamenei. Each time Mr Khatami advocates an opening to the west, Mr Khamenei publicly rebukes him.
"The number one enemy of our country and our people is oppression, that is to say the United States," Mr Khamenei declared in a recent speech to thousands of revolutionary guards. In a clear allusion to Mr Khatami, he denounced those "who try to alienate the Iranian people by suggesting normal relations with the US".
One of Mr Khatami's supporters, the 22-year-old son of a high-ranking official, turned up in the US last summer saying that Ayatollah Khamenei and the head of the Pasdaran, Mr Rahimi Safavi, were plotting to overthrow Mr Khatami. The young man, Mr Ahmed Rezai, claimed the Iranian president fears for his life.
Mr Khatami was democratically elected by 70 per cent of Iranian voters in May 1997. His people still admire him, but they see him as powerless and threatened. Elsewhere in the Middle East, one faction would have overthrown the other and killed or imprisoned their opponents. The bitter co-existence of ideological enemies within one regime is unique to Iran.
The constant tug-of-war between nebulous factions surrounding Mr Khatami and Mr Khamenei has led to an anarchic situation in which advocates of reform are terrorised as a means of weakening the president. Members of the Baha'i faith are still persecuted - one was executed in July for allegedly converting a Muslim woman. Mr Khatami's spokesman and Culture Minister, Mr Ataollah Mohadjerani, was attacked by fundamentalists on a trip to the provinces.
The campaign against reformers turned murderous in late November when Mr Daryush and Mr Pavaneh Forouhar, activists in an opposition party that advocated secular government, were stabbed to death in their Tehran home. By mid-December, the bodies of three other Iranian intellectuals, all writers, were found in the Tehran area. The cause of Majid Sharif's death was uncertain, but Mohamed Mokhtari and Mohamed Pouyandeh died of strangulation.
In 18 months in office, Mr Khatami has made little progress in his attempts to establish the rule of law, respect for citizens' rights and freedom of expression.
Iran is the only country in which Islamists have come to power through a mass revolution. The crucial and still unanswered question is whether the revolution will be able to reconcile itself with modernity, democracy and the international community.
Mr Khatami yesterday condemned all terrorist acts "whether in Iran or Pakistan" and called for negotiation to settle the Afghan civil war. He made the remarks after gunmen opened fire on Ramadan worshippers in a crowded mosque in Pakistan early yesterday, killing 16 people in a suspected Muslim sectarian attack.
"The Islamic Republic condemns all forms of terrorism and acts of violence, whether in Iran or Pakistan, and hopes such acts will end in Pakistan," he was quoted as saying by Tehran radio after meeting Pakistani Deputy Foreign Minister, Mr Shemshad Ahmad Khan.