A link farm is any group of web sites that all hyperlink to every other site in the group. Although some link farms can be created by hand, most are created through automated programs and services. A link farm is a form of spamming the index of a search engine (sometimes called spamdexing or spamexing).
I basically avoid any link exchanges that look spammy at all. If they can't be bothered to put my link on a relevant page, I won't exchange links with them. If my link is going to be on the same page as a link to a shady neighborhood, I stay away from that link exchange too. Almost any site that does a high volume of unrelated link exchanges could be considered a link farm.
Will do you serp's a whole lot of good! No just kidding, Stay away from them they will just give your sites to google bad rankings, Natural link building, Directories, Blog & Ping, Article Making, All of the above are the best ways
No, web directories are not considered as link farm. Some high PR directory is very helpful to getting backlinks and traffic. One is best directory see DMOZ.
If you ask me auto approving directories are the perfect example of a link farm. Anyway, here is the Wikipedia's definition: http://en.wikipedia.org/wiki/Link_farm
Since your DP nick is SEO Master789, I think you should know about link farms. But I do offer this piece of advice... If you are on a farm, make sure you are milking a cow and not a bull!
I apologize that I did not see your location in your post. From my limited knowledge of India, cows are sacred and no disrespect was intended. There are not many link farms around these days because most people avoid them. Free for all link pages (FFA) are a good example of link farms. They provide no benefit because they are filled with many unrelated links. Google itself suggests to create a HTML sitemap for visitors, but to not exceed 100 links per page. That is a good indication of the maximum number of internal links they will accept on a page. However, external links may have a much lower threshold. More information on link farms can be found at the URL below: http://en.wikipedia.org/wiki/Link_farm
A link farm is a group of highly interlinked websites with the purposes of inflating link popularity (or PR). A link farm is a form of spamdexing, spamming the index of a search engine.