Hashem Aghajari's lawyer said on Tuesday that the verdict proves his client is not an "apostate".
"I am very happy. I feel very proud that what I said all along has been recognised. He was not an apostate and did not insult the prophet," Saleh Nikbakht said, but nevertheless promised to appeal.
Aghajari was also sentenced to five years' deprivation of his social rights, which will commence after his term in prison ends.
The dissident has already spent nearly two years in jail, which his lawyer said would be deducted from the sentence. This means Aghajari should be released after one more year behind bars.
The leftist activist, who lost a leg in the 1980-1988 Iran-Iraq war, sparked the wrath of Iran's establishment when he said in a speech to students that Muslims were not "monkeys" and "should not blindly follow" religious leaders.
'Insulting religious sanctities'
He was sentenced to death in his first trial, behind closed doors, in the western city of Hamedan in November 2002.
After the verdict sparked widespread student protests, supreme leader Ayat Allah Ali Khamenei intervened and ordered a retrial.
But after the same court defiantly upheld its verdict in a retrial, a second round of hearings was ordered to take place in a more sympathetic court in the capital, Tehran.
"I am very happy. I feel very proud that what I said all along has been recognised. He was not an apostate and did not insult the prophet"
Hashem Aghajari's lawyer
The judiciary also dropped all charges on Monday that could lead to the death penalty.
Aghajari was instead slapped with lesser charges of insulting religious sanctities, propagating against the regime and spreading false information to disturb the public mind.
Those charges carried a jail term of between five and 10 years.
"Regarding insulting religious sanctities, I am sure that if this case is taken to the Supreme Court... this sentence will be revoked and my client will be cleared of the charges," Nikbakht said.
"I am confident he will be cleared on appeal," he asserted, but added that if that failed he would apply for a pardon to coincide with the anniversary of the 1979 Islamic revolution, which falls in February 2005.
Ayat Allah Ali Khamenei ordered
a retrial for Hashem Aghajari
"I have reached the conclusion that in dealing with the Iranian judiciary, you can only move your case forward with sensitivity and moderation," the lawyer said.
Iran's judiciary is seen as a bastion of the Islamic republic's religious right-wing, and has frequently been accused of targeting reform-minded figures.
Aghajari is currently being held in remand in Tehran's Evin prison, and has complained of spending long periods of time in solitary confinement.