That's definitely the implication, yes. It's a sentence that should be taken fairly literally, if obscurely.
Story-wise, this serves a functional purpose. It shows someone who used to perform actions counter to what the government wanted, and was, in essence, reformed into participation.
O'Brien is extremely knowledgeable about the past - likely far more than he lets on to Winston. On top of that, it seems that people of the Inner Party are all generally more well-read than those of the Outer Party (go figure). How else would they know about the contents of books?
'It is called wine,' said O'Brien with a faint smile. 'You will have read
about it in books, no doubt. Not much of it gets to the Outer Party, I am
He's also knowledgeable about the sort of philosophy that - guess what - comprises mostly terms you'd find in books, and the sorts of things you'd really only learn from books:
O'Brien smiled faintly. 'You are no metaphysician, Winston,' he said.
'Until this moment you had never considered what is meant by existence. I
will put it more precisely. Does the past exist concretely, in space? Is
there somewhere or other a place, a world of solid objects, where the past
is still happening?'
This smacks of someone well-read. And these two examples were easy to find - if you search for "O'Brien," the book is littered with references to how knowledgeable he seems to be about the past.
But that aside, this is also an important jab at Winston's only real hope at escape:
He thought oftener of O'Brien, with a flickering hope. O'Brien might know that he had been arrested.
While it's possible to hypothesize about how O'Brien ended up in government work following being had, perhaps suggesting that practices have changed over time, or aren't as absolute as they seem, the fact remains: he was probably caught, and was probably stopped.