I think I didn't explain it properly. My site was and is listed and ranked by Google before and after this update.
The site I link to got greyed out on the toolbar, while there are almost 7,000 links to the site in Google's index (ie. doing Google search: domain site:www.domain.com). The links are pure html domain links (ie. [domain.com...]
My question is - is this site penalized for something? This is an important link to me as that site has only a handfull of outgoing links.
If the site is penalized I wouldn't want to get any of the penalty rubbed onto my site, by linking to it. Also the site I link to has been around since 99 and is clean (ie. nothing hidden, nothing sneaky - to what I can tell).
Thanks.