Here is what is happening according to my friend. This information is a few months old, before the recent crackdown. Also, it represents the views of only one person, and so may not represent more than that, depending on the issue.
My friend's family is religious and conservative, at least in the older generation. Even they are turning against the mullahs, because the mullahs are corrupt and hypocritical, and the economy is a mess. Young people are very western-oriented and can't stand the theocracy. People of all ages have private parties where there is music, dancing, mixing of sexes, western dress, and sometimes alchohol (my friend loves wine). I saw pictures of such a party in a private home. The only support the mullahs have is from underclass city people, many who are employed as "muscle", and peasant farmers - the least educated parts of society (what a surprise).
Few people are really afraid of the US or think that the internal opposition is fueled by America. They think that Ahmadinejad is provoking conflict, but don't think it will really come. In fact my friend said that most people have positive views of the US, and many have positive views of Bush. My friend's mother is in that group for one major reason. She hated Saddam. One of her son's, my friend's older brother, was killed in the war. She credits Bush with the removal and execution of Saddam, and she celebrated on the day he was hung. In fact, my friend said that Bush is widely seen as having gotten rid of Iran's two biggest enemies - the Taliban to the east and Saddam to the west. Go figure.
As far as I can tell from what my friend told me, the best policy toward Iran would be to continue to work with other countries to squeeze Iran to slow it down in as it tries to build nuclear weapons, give moral support (maybe even a bit more than that) to the pro-democracy movement in Iran, and hope that the mullahs are taken down internally. I suspect that if such an outcome occurs, it will happen very quickly, beginning with a small incident that snowballs into a revolution that catches most by surprise. Maybe something like this
http://www.guardian.co.uk/iran/story/0,,2036297,00.html