With rugby in its infancy as a professional sport, he had established himself as one of the hottest properties in the game. He was 24, the playmaker in the star-studded Northampton Saints team of the time, and he was being courted by a handful of other clubs after guiding the Lions to a Test series win in South Africa. Things, as the song of the time suggested, could only get better.
But they didn't. The next season, 1997/98, was the worst of Townsend's career. Like many other members of that victorious Lions squad, he suffered a savage form dip in the wake of their triumph. "It was definitely in my mind, subconsciously, that I expected things to happen more," he recalled.
The memories of that time have informed Townsend's preparations for the new RaboDirect PRO12 season, which begins when his Glasgow Warriors takes on Cardiff Blues at Scotstoun on Friday. Having reached the semi-finals of last season's competition, when they missed out on a place in the final only by the achingly narrow margin of a two-point loss to eventual champions Leinster, expectations around Glasgow are huge.
A recipe for disaster? "That's so Scottish," laughed Townsend, but he is still well aware that his side cannot stand still. With three players - Stuart Hogg, Sean Maitland and Ryan Grant - returning from this year's Lions tour, and many more back from Scotland's short trip to South Africa, he knows he has to keep things fresh, keep challenging his charges to do better.
"You have to treat every player differently," said Townsend. "There is a difference in the current training focus because the Lions guys came into the group two weeks later than our Scotland players, who had come in five weeks later than everyone else. There are going to be times when we have to manage them. They have been on a Lions tour and that takes a lot out of you mentally and physically.
"But they are all buzzing. They can't wait to play. They've had a great experience because to be selected for the Lions is the ultimate experience for any British or Irish player, and to be involved in a winning squad is fantastic. Rubbing shoulders with quality international players will have made them better players. We are hoping we get the benefits and they kick on this season."
The build-up began with a training camp a few weeks ago. Or, rather, just a camp, as players and management went under canvas in the Aberdeenshire countryside on an exercise that included a little cycling and mountaineering, and a lot of team bonding. It also involved a lot of midges, most of them gnawing on Townsend and his fellow coaches, who had pitched their tents near a river.
At the mid point of the World Cup cycle, the rugby transfer market has been quiet of late. Weighing up the few movements there have been, Glasgow have fared no worse - and, in may regards, far better - than most Pro12 clubs.
"The main aim was to re-sign the players we wanted to re-sign," said Townsend. "It was great that we got them. Then we looked at the gaps and where we wanted to strengthen. I'm very happy with the five players we've brought in. That will be it. I think our last signing was announced last week and I can't see any more players coming in.
"So I'm very happy with the squad. There's really good competition and the depth is very good. There are a couple of positions where I think we have four people challenging for a starting place. You need that. We used 51 players last year and it would be great if all 51 were at a level where they can take their opportunities."
And what of Townsend himself? When he was appointed in controversial circumstances 18 months ago, there were some who relished the prospect of watching him fail, but Townsend all but silenced the criticism as he propelled Glasgow through a season in which they chalked up a record sequence of victories, scored more tries than any other side in the league yet also boasted the most miserly defence in the competition.
Townsend said: "I would say I now understand the work that has to go in. The pressure and other people's opinions are not part of the reality here. You just have to work really hard. I'm much more comfortable because I now know the players well, what they can do, what they are capable of.
"There were a lot of unknowns last year. I hadn't been a head coach before. I'm sure I will still make mistakes, but over the past 12 months there have been a lot of situations I had not been in before so I have a better idea of what it all involves. It is not an easy job. You have to work really hard, and the competition we are up against in the pro 12 and the Heineken Cup will only get tougher.
"In many ways I am more comfortable because I have been in the job for a year, but I also realise that it doesn't get any easier. It only gets tougher."
The next few weeks might be the toughest of all. Glasgow go into the season without two international fly-halves, Ruaridh Jackson and Duncan Weir, who are both injured. Niko Matawalu, the scrum-half sensation of the last campaign, is also sidelined for the next few weeks. Peter Horne is set to miss almost the entire season.
Yet the Warriors have more depth than ever before, and they also have a coach who is prepared to be patient. "We lost our first two games last season and then I think we won the next six," he shrugged. "Would you take six wins from eight games? Of course. As long as you are there at the end, that's what matters. The finish is more important than the start, but it's obviously better if you can start at a level that you can then build upon."