In 1998, Khan appeared in three films. His first release was Mahesh Bhatt's action comedy, Duplicate opposite Juhi Chawla and Sonali Bendre. The film, which saw him portray a double role, marked his first of many collaborations with Yash Johar's production company, Dharma Productions. The film however, failed to do well at the box office. He then won critical praise for his performance in Mani Ratnam's acclaimed Dil Se... The film was the third in Ratnam's trilogy of terror films that depict human relationships against a background of Indian politics, after Roja (1992) and Bombay (1995). Khan played the part of Amarkant "Amar" Varma, an All India Radio correspondent, who develops an infatuation for a mysterious terrorist, played by Manisha Koirala. Rediff.com published, "Khan delivers a compelling performance. He plays the part with taut restraint, and expresses exasperation superbly." The film,which failed financially in India, however, emerged as a commercial success overseas, becoming the first Indian film to enter the top 10 at the United Kingdom box office.
His final release of the year was Karan Johar's candyfloss romance, Kuch Kuch Hota Hai, which paired him with Kajol and Rani Mukerji. The film was declared an "all time blockbuster", with a worldwide gross of over
1 billion. Khan played the role of Rahul Khanna, a college student, who falls in love with his best friend (Kajol) after the death of his wife (Mukerji), years after breaking contact with her. His performance won him the Best Actor award at the Filmfare ceremony for the second consecutive year. Khan's only release in 1999, Baadshah opposite Twinkle Khanna, was an average grosser, for which he earned a Filmfare Award nomination for Best Performance in a Comic Role. In the same year, Khan set up his own production company, Dreamz Unlimited with actor, Juhi Chawla and director, Aziz Mirza. (see below). In 2000, the three collaborated on their first film, Phir Bhi Dil Hai Hindustani. The film opened to mixed reviews from critics and audiences alike and failed to emulate the commercial success of the trio's previous films, Raju Ban Gaya Gentleman and Yes Boss.
Khan's next release was Mansoor Khan's action drama Josh. The film starred Khan as the leader of a Christian gang in Goa, with Aishwarya Rai playing his twin sister. The film emerged as a box office success in both India and abroad. Vinayak Chakravorty of Hindustan Times wrote that Khan "basks in his tailormade role, donning with panache the garb of a streetsmart tough. " He next played the role of a Muslim archaeologist, beaten to death during the unrest following the partition of India in Hey Ram. Directed by and co-starring Kamal Hassan, the film was critically acclaimed and was selected as India's entry for the Best Foreign Language Film at the Oscars that year. Additionally, for the Tamil version of the film, Khan dubbed for his own lines. His final release of the year was Aditya Chopra's romantic drama, Mohabbatein, co-starring Amitabh Bachchan. The film was a major financial success, and Khan's performance as a music teacher was acclaimed by critics; Taran Adarsh of Bollywood Hungama mentioned him to be "outstanding as Raj Aryan." He was awarded his second Filmfare Critics Award for Best Actor for his performance in the film.