The eight years of Mohammad Khatami's two terms as president in 1997–2005 are sometimes called Iran's Reform Era.^[122] Mohammad Khatami's presidency, beginning on May 23, 1997, marked a significant shift in Iran's political landscape, emphasizing reform and modernization. Winning the election with a remarkable 70% of the vote amid a high turnout of nearly 80%, Khatami's victory was notable for its broad-based support, including traditional leftists, business leaders advocating economic openness, and younger voters.^[123]

Khatami's election signaled a desire for change in Iranian society, particularly after the Iran-Iraq War and the post-conflict reconstruction period. His presidency, often associated with the "2nd of Khordad Movement," focused on the rule of law, democracy, and inclusive political participation. At first, the new era saw significant liberalization. The number of daily newspapers published in Iran increased from five to twenty-six. Journal and book publishing also soared. Iran's film industry boomed under the Khatami regime and Iranian films won prizes at Cannes, and Venice.^[124] However, his reformist agenda frequently clashed with Iran's conservative elements, particularly those in powerful positions like the Guardian Council. These clashes often resulted in Khatami's defeat in political battles, leading to disillusionment among his supporters. In 1999, new curbs were put on the press. Courts banned more than 60 newspapers.^[124] Important allies of President Khatami were arrested, tried and imprisoned on what outside observers considered "trumped up"^[125] or ideological grounds.

Khatami's administration was constitutionally subordinate to the Supreme Leader, limiting his authority over key state institutions. His notable legislative attempt, the "twin bills," aimed to reform election laws and clarify presidential powers. These bills were passed by the parliament but were vetoed by the Guardian Council, symbolizing the challenges Khatami faced in implementing reforms.

Khatami's presidency was characterized by an emphasis on press freedom, civil society, women's rights, religious tolerance, and political development. He sought to improve Iran's image internationally, engaging with the European Union and becoming the first Iranian president to visit several European countries. His economic policies continued the industrialization efforts of previous governments, focusing on privatization and integrating Iran's economy into the global market. Despite these efforts, Iran faced significant challenges, including unemployment and a persistent struggle with poverty.

In foreign policy, Khatami aimed for conciliation over confrontation, advocating a "Dialogue Among Civilizations" and attempting to mend relations with the West. Several European Union countries began renewing economic ties with Iran in the late 1990s, and trade and investment increased. In 1998, Britain re-established diplomatic relations with Iran, broken since the 1979 revolution. The United States loosened its economic embargo, but it continued to block more normalized relations, arguing that the country had been implicated in international terrorism and was developing a nuclear weapons capacity.