The meeting, the latest sign of the warming relations between Tripoli and Washington, took place on the sidelines of the UN General Assembly session on Saturday.
"We have had a very good discussion of a path toward Libyan-US relations that will lead us to better and better relations between our people, between our governments," Rice told reporters.
Diplomatic relations between Washington and Tripoli were restored in June 2004 after a 24-year rupture following Libyan leader Muammar al-Qadhafi's surprise announcement the previous December that he was giving up the quest for weapons of mass destruction.
US Assistant Secretary of State for Near Eastern Affairs David Welch travelled to Tripoli last June.
"Libya made a historic decision to get rid of its weapons of mass destruction and I think that it is paying off for Libya in the sense that American companies are there, that we are having this meeting and that we are talking about how to continue and push forward our relationship," Rice said.
"Libya made a historic decision to get rid of its weapons of mass destruction and I think that it is paying off"
US secretary of state
"It has been a good thing for the world and for the international community to see the leadership of Libya and your leader making this historic decision, and a decision that was taken for peace," she added.
A US State Department statement said Rice thanked Libya for its efforts to resolve the crisis in Darfur in western Sudan and for its cooperation in the fight against terrorism.
Shalgam praised improved relations, reaffirmed Libya's commitment to renouncing terrorism "in all forms" and spoke out against acts of international terrorism that targeted civilians, the statement said.