What country in the Middle East supports a flourishing terrorist network and is steadily acquiring weapons of mass destruction? If you said Iraq, you're one letter off. It's Iran, which the State Department has long branded "the most active state sponsor of terrorism in the world." Last week Washington produced satellite photographs to demonstrate that Iran was "actively working on a nuclear-weapons program." Why is a state with vast oil and natural-gas reserves investing so heavily in nuclear power? (The only other oil state that said it needed nuclear reactors was... Iraq.) It would be like Saudi Arabia's building windmills.

Iran is also a vigorous exporter of Islamic fundamentalism. For two decades now Tehran has funded radical Islamic movements, scholars and centers around the world. At its worst Iran is Iraq plus Saudi Arabia, all in one country.

And yet many observers look at Iran and see it as the most hopeful place in the Middle East. They point out that it holds elections, has a reformist president, and its women have more political rights than in many Arab countries. But Iran's democracy is a sham. The president, Mohammed Khatami, is a figurehead, allowed to give high-minded speeches and do little else. Almost three quarters of the way through his reign, he has accomplished virtually nothing by way of political reform. In some ways Iran is more closed today than it was when he was elected in 1997. For example, more than 80 reformist newspapers have been shut down in the last few years.

The fundamental mistake people make about today's Iran is to assume that the reformers--who speak in tones that the West can understand--wield power. There have always been such figures. The first president of the Islamic republic was Abolhassan Bani Sadr, a Paris-educated liberal. He lasted a year. Iran is a theocracy; the reformers and moderates are window dressing. Real power rests with a tiny clerical establishment.

That power is now under serious challenge. Students are protesting in Tehran by the thousands. The middle classes have expressed their disgust with the regime by voting in every recent election for the most anti-regime candidate on the ballot. Most important, leading clerics are criticizing the regime and distancing themselves from it. A brave professor, Hashem Aghajari, has dared the regime to execute him for his "crime"--which was to advocate publicly the separation of mosque and state. But this is not an equal fight. The mullahs have all the money and power.

The clerics have created a network of supporters and enforcers who keep things tightly under control. There are several shadowy gangs of thugs--the largest of them a Hitler Youth-type group called the Basij--that go around terrorizing people. They operate above and beyond the law, breaking up demonstrations, even those that have been approved by local authorities. Then there is the secret police. One of the ironies of Iran today is that the mullahs came to power riding a wave of fear over the shah's dreaded Savak. But the only institution of the old regime that has been maintained, indeed fortified, has been the Savak, now called the Savama.

Despite having run the economy into the ground, there is a powerful minority in Iran that has greatly benefited from the revolution. The clerics use their oil loot to keep happy a cadre of religious leaders, corrupt bureaucrats, student revolutionaries and Army officers. These people will not suddenly mellow into liberal democrats because they watch students protesting. The mullahs must be pushed.

The strategy for reforming Iran will have to be quite different from that for Iraq. Iraq requires a hard (military) strategy, Iran a soft (political) one.

The most hopeful aspect of Iran's tragedy is that it has dimmed the allure of Islamic politics. Iranians now have a visceral disgust with clerics in power, a backlash that is more likely to produce the separation of mosque and state than scholarly writings about an Islamic reformation. Washington should make a major effort to publicize the mullahs' greed. It can obtain--from Switzerland, Luxembourg, wherever--the hard evidence that will show Iranians that their sainted leaders are as corrupt as Africa's worst tin-pot tyrants. Iranians already suspect this, but they cannot know the extent of the damage.

Washington should also fund the satellite-television stations, many beaming out of Los Angeles, that have become manna for information-starved Iranians. Most of their programs are not particularly political, but news, entertainment, fashion--all harmless windows into the modern world--are the slow killers of a closed society. Many of these stations are struggling for lack of money. Small sums could make a big difference.

Gilles Kepel, France's leading scholar of the Middle East, was in Tehran recently. At a dinner party an Iranian woman came up to him in utter exasperation and said, "Can you believe that those peasants in Afghanistan have been liberated and we have to keep wearing this ridiculous higab [veil]?" The lady might have to wait. Unlike Afghanistan, Iran will have to liberate itself. But we can help.