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:

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 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.