The Bush administration's decision to restore U.S. diplomatic relations with Libya and open an embassy in Tripoli is the right move, despite the history between the two nations.
American governments sometimes have the bad habit of assuming that maintaining diplomatic relations with a country is somehow an expression of approval of the regime in power in that country.
A more practical and useful position is that diplomatic relations with a country provide a means to communicate directly with the government, regardless of what the U.S. government in power and Americans in general may think of the foreign government's actions.
It was on the basis of disapproval of the actions of the government of Libya's leader, Col. Muammar Kaddafi, that U.S. relations with Libya, broken in 1979, were not restored until now. The problem with that approach is that restoration of relations implies that the United States now approves of the actions of the Kaddafi regime in Tripoli.
Basing U.S. relations with Libya - or with any country, including others with which the United States does not have normal relations, such as Iran, Iraq before the war, and North Korea - on approval of its policies is naive and doesn't make sense.
The United States needs communications with countries whose governments' policies it does not like. You could make the case that it requires effective communication with the governments of those countries even more than it does with those of countries it approves of.
To a certain extent, Colonel Kaddafi's government in Libya has cleaned up its act in recent years. It more or less came to terms with its 1988 bombing of Pan Am 103. It publicly gave up its weapons-of-mass-destruction programs. It got itself off the "state sponsors of terrorism" list by formally renouncing terrorism, and, according to the Bush administration, cooperating with the United States in the war against terrorism. We will assume that U.S. intelligence about what goes on in Libya is good enough to make a determination that it has in fact changed its stripes.
What is sure is that Colonel Kaddafi's government has not changed its ways in terms of its approach to democratic government. It still has the usual political prisoners, no elections, no free press, and Colonel Kaddafi's son Saif-al-Islam, as his most likely successor, isn't likely to change the approach to governance in Libya.
What the Kaddafi government has done is welcome U.S. companies back to Libya to try to bring its staggering oil industry into the 21st century in terms of technology and production. Its new positive attitude toward U.S. oil companies underlines its status as a producer-of-oil state, as opposed to a sponsor-of-terrorism state.
It probably doesn't matter that the Bush administration changed Libya's characterization and will open an embassy there for hokum reasons. It probably doesn't hurt us much to kid ourselves about Libya and Colonel Kaddafi. What is important is that the change in policy should result in useful improvement in the quality of communications between the two countries.