A link farm is mere collection of links with no set categories under which the links are placed. Anyone and everyone can submit their links and there is little or no editorial review of these links. In essence, these links have been built for the sole purpose of manipulating the search engines and not designed for the end user. One can identify a link farm from its link pages, where there are hundreds of links on one page and all of them linking to out sites of various topics. There is basically no meaningful purpose or intention behind the links on the page.
A web directory, on the other hand, is not only a collection of links but the links have been categorized under relevant topics and sites are listed only after they undergo editorial review. Directories are useful to the user in that if a user wanted to find a site under a particular topic, it would be easy to go to the appropriate category and choose from the selection of links. All links in a web directory are well-categorized and meaningfully sorted out. Not every link that is submitted to a directory will necessarily be listed as there is always some kind of supervision over the links allowed in a directory.
Having a link on a link farm wouldn’t be counted for much, if at all, by the search engines while having a link on a web directory would definitely count for more value. It’s advisable to avoid having links on the so-called “FFA” or “Free For All” Links pages or any pages where there seems to be no order and flow in the way the links are displayed.