I'm not sure how the google "link farm penalty" works. But would suggest just building a links directory that works well for your site. When re-modeling my links page I read the pertinent threads at this forum - and researched other sites links pages for ideas to incorporate into my links page.
Personally I like the idea of a links directory as opposed to incorporating the links within your site. I feel that if you are going to incorporate links within your free flow context - there should be an index/directory which includes all the sites you link to. It keeps your site clean & easy to navigate.