Following the overthrow of Muammar Qadhafi, Libya’s National Transitional Council inherited a difficult and volatile domestic situation. The new leadership faces serious challenges in all areas of statehood. Libya’s key geostrategic position, and role in hydrocarbon production and exportation, means that the internal developments in Libya are crucial not only to the Libyan people, but also to neighboring countries both in North Africa and across the Mediterranean in southern Europe. Therefore, mitigation or prevention of conditions that could lead to Libya becoming a failing or failed state is of vital importance. A review of the major challenges to the new Libyan regime, including the continuing role of tribalism and the difficulty posed by the new government’s lack of monopoly on ensuring security in Tripoli and beyond are discussed. Special attention is given to the key issues of concern that foreign partners should have when engaging with the new Libyan leadership; and a number of policy recommendations are made as well. Libya’s immediate future is of critical importance, and will determine whether the country faces state consolidation or state failure.