There is an excellent thread at WebmasterWorld discussing if Google will ever fully "forgive" a site after it has been penalized.
For example, let's say you have been slapped with a link penalty, and you remove all those bad links. Will Google every rank you as well as you once ranked? The thread has some excellent experience to quote:
Senior member, netmeg, said that Google does completely forgive:
one of my clients was completely banned from Google for a spammy link exchange program; we cleaned 'em all up and filed a reinclusion request, and they are currently #1-3 for just about every relevant search phrase you could think of. They're ranking higher now than they ever did before the penalty - but it did take about a year to work their way up to that point.
Yes, I agree that it takes a long time to earn back your trust from Google.
But WebmasterWorld administrator asks a key question, Google may forgive, but do they forget? Tedster said:
I do think Google always has a record of the past penalty somewhere, and any future infractions might be dealt with quite harshly.
I am very confident Google records each and every penalty for a website, historically. This is incredibly important data for Google to have when manually reviewing a reconsideration request. Does Google have a three-strikes and your out rule? I doubt it, but all this information is 100% relevant for the process.
Forum discussion at WebmasterWorld.