Trying to bend the truth
Their honor didn't hinge on the Avatar's capture...mine does.
Zuko's obsessed with regaining his "honor," but I don't think that word means what he think it means. Initially it's more about getting back on his dad's good side than anything honorable per se; after all, the reason he's "lost" his honor to begin with is because he stood up to his dad and remained true to his principles (not wanting the Fire Nation to needlessly kill people in the war, and subsequently not wanting to fight his dad over mentioning this in a war conference (S01E12, "The Storm")). So actually, what he did to "lose" his honor is to remain honorable: he tried to save people and avoid fighting and potentially hurting his dad (not that a fight at this point between Zuko and Ozai would have been any contest—and it isn't—but at least Zuko's heart's in the right place).
Pretty much from the start Zuko is both whiney and verbose about the whole honor thing, but again, the focus on "honor" is more about getting back in his father's good graces than doing or being anything particularly honorable. And the only way Zuko sees to do this is to find the Avatar. Which means keeping other people, like General Zhao, from finding out what Zuko knows. For someone trying to regain his honor, Zuko does a lot of manipulating, stealing, and lying.
Zuko has the chance to kill Zhao after fairly beating him in an agni kai (S01E03, "The Southern Air Temple"), but refuses to do so (though he claims he will next time Zhao gets in his way). When Zhao tries to kill Zuko a moment later, Iroh steps in and tells him he's nowhere near as honorable as Zuko, even though Zuko's the one in exile. The expression on Zuko's face at that point is priceless—a perfect grumpy teenager mixture of surprise, embarrassment, and appreciation—and we get the first real inkling that Zuko is a much better guy than he lets on. And Iroh knows it, even if Zuko himself doesn't.
As a fugitive in season two, Zuko's concept of honor further deteriorates. Frustrated with having to live incognito as a peasant refugee, he uses the Blue Spirit identity to steal even though Iroh warns him that this sort of theivery isn't exactly honorable (S02E05, "Avatar Day"). In fact, this dispute causes Zuko and Iroh to part ways for awhile, leading to a seriously awesome episode in which Zuko, traveling on his own, tries to protect an Earth Kingdom family against some less-than-honorable thugs (S02E07, "Zuko Alone"). Things don't go as he'd hoped, but this episode is a real turning point for Zuko as he comes to realize that being honorable isn't about getting what you want, but doing what needs doing even if the people you're doing it for don't appreciate it.
I think the real reason Zuko doesn't get a grip at the end of season two is the way "honor" is presented to him at that point. Iroh tells Zuko it's time to choose good…so if Zuko had, it would've been acquiescing to Iroh's ideals, not Zuko coming to his own decision. While it still seems pretty unbelievable that Zuko would go with anything Azula says, the reason he does so probably lies in the fact that she presents it as his choice. He can choose to help her capture Aang. He can choose to restore his own honor.
So he makes a truly crappy choice.
And several minutes later in the narrative, he's already regretting it.
The first half of season three, during which we see an excruciatingly frustrating series of events involving Zuko getting everything he thinks he wants at home in the Fire Nation (respect, love, cute girlfriend, a ridiculous number of servants), Zuko's really figuring out what the whole honor thing means to him. He visits Iroh in jail and, while he acts like a real jerk to his uncle, he's also desperately missing Iroh and feeling miserable about betraying him. Ozai may tell Zuko he's regained his honor, but Zuko's just not feeling it.
Ironically, Zuko doesn't fully regain his honor until he finally cuts ties with Azula and Ozai and goes to help Aang (S03E12, "The Western Air Temple"). Team Avatar doesn't make it easy for Zuko (and rightly so--he deserves to sweat a bit for everything he's done!), but Zuko sticks with it, doing everything he can to convince the crew that he knows the right thing to do now.
It sure takes him a helluva long time, but Zuko does eventually realize what honor really is, and what he has to do to regain it. Best of all, he makes his final decisions and realizations on his own--influenced by others, Iroh in particular, but making the really hard choices himself, rather than having someone else tell him what to do.
And that, folks, is why Zuko's cool.
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