Before: 
After: 
I had some pretty bad spiderweb cracks in this headlight so I had to remove a decent amount of material to get rid of them. I started out wet-sanding with 400 grit, then 800, and finished with 1500 grit. After everything was sanded smooth, I used a
Novus 3-step plastic polishing kit ($11.95 shipped from Spa Depot).
It took me about 3-4 hours by hand, but I'm a perfectionist and stuff like this usually takes me a long time. If you decide to use any type of machine to do this, be careful... plastic is very sensitive to being over-heated. I only did the passenger side headlight, the driver's side was replaced not long before I bought the car due to the previous owner having an accident. I will probably pull the driver's side light next weekend and hit it with the Novus polish.
Here is an after pic: 
Here are all of the pictures that I took showing the progress:
linky
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Updated on 05/03/2006:
Here is a link to a Mustang site with a similar process to mine, just using different products. He also took some good pictures along the way:
http://forums.stangnet.com/showthread.php?t=536689