The government is split between hardliners, who want to execute more protestors, and respond more harshly to street demonstrators, and those who feel that killing protestors and opposition leaders will only create martyrs and inspire the opposition to more violence. These softliners are in charge, and have undertaken an Information War campaign involving discrediting opposition heroes in the media and the Internet, and encouraging government partisans to continue Internet based attacks on opposition supporters outside Iran (including Twitter, which is much hated by the clerics). This has backfired a bit, as one group of pro-government hackers also shut down China's largest search engine for four hours.
The government makes much of the few foreigners arrested as demonstrators. But the government also plays very dirty, assassinating opponents, and blaming the deaths on Israel and the U.S., or, if possible, the opposition. More opposition leaders are being physically attacked, indicating that, while the government wants to avoid creating martyrs, it is not opposed to putting opposition leaders into a hospital, or in hiding.
The government is more concerned with its economic problems. If the economy doesn't grow, and unemployment decline, the opposition will have a lot more supporters. The corrupt clerics who have controlled the government, and economy, for decades, have made a major mess. The corruption and cronyism has created many inefficient state owned industries, and an economy that can't grow. Inflation does grow (currently it's 15 percent), as the government prints more money. Efforts to phase out subsidies on fuel and food fail because the legislature is responding to populist pressure. These subsidies are a major economic asset for many barely employed Iranians, no matter how inefficient the subsidies may be.
There is a growing problem with drug addiction. This has led to a minor war on the Afghan border. There, over 100,000 police and troops battle the armed Afghan smugglers who bring in 40 percent of Afghanistan's annual opium and heroin production. Most of that just passes through Iran, on its way to more lucrative (willing to pay more) markets in the Persian Gulf, Middle East and Europe. The war on the Afghan border causes over a thousand casualties a year, and many more arrests. But the drugs keep coming, as the growing number of Iranian addicts can attest.
January 17, 2010: Saudi Arabia has pulled out of a major Islamic sporting competition, to be held in Iran in April, because Iran insisted on using the term "Persian Gulf" on the medals. Arabs now insist that this body of water be called the "Arab Gulf." This sort of thing annoys the Iranians a great deal. The Persian Gulf has been called the Persian Gulf for thousands of years, and it's only since the Arabs got all that oil money in the last sixty years, that this "Arab Gulf" business has come up. The Arabs are also angry at Iran, for trying to take over leadership of the Islamic world. In response, Saudi religious police have been harassing Iranian pilgrims going on the Hajj to Mecca (where Shia worshipers use different rituals than mainstream Sunnis.) Iran has halted Iranians from making the pilgrimage until the Saudis call off their religious police. Month by month, act by act, people on both sides of the Gulf are getting angrier at each other.
January 16, 2010: In the northeast, a man with a bomb, set off the explosives (and later died) when approached by police. No explanation of who he represented, or who the target was.
In the UN, China again blocked any more sanctions for Iran. China is one of the five security council members with a veto, and regularly uses it to support its economic ties with Iran. The U.S. is using its clout in the international financial community to impose its own sanctions on Iran. The U.S. is also looking for more ways to aid the Iranian opposition.
January 12, 2010: A pro-reform college physics professor Masoud Ali Mohammadi, was killed by a motorcycle bomb, outside his home in an upscale suburb of the capital. The government blamed the killing on Israel and the United States. The opposition provided evidence that the killing was done by the government, using Lebanese (Hezbollah) mercenaries. The victim had nothing to do with the nuclear weapons program, and was selected because the government could imply otherwise and pin the murder on foreigners.
January 7, 2010: Another two hundred people were arrested in the last week, for participating in protests against the government. The hardliners in the government now have permission to arrest clerics who back reform, and to use more violence against demonstrators, and their leaders.
January 6, 2010: The government banned Iranians from having any contact with sixty foreign organizations (including the BBC, opposition websites outside the country, and many activist groups). This makes it easier for the government to arrest anyone they want.
January 1, 2010: Opposition leader Mirhossein Mousavi says he is willing to die for the cause.