I am going to concentrate on the underlying categorical issue here and leave the homological algebra to the experts in that subject.

A **direct limit** is also known as a **colimit**.  Yours, I take it, is over a sequence $N$, and as such is called **directed** or **filtered**.

Being an short exact sequence $0\to A\to B\to C\to 0$ amounts three things:

- $A\to B$ is a **monomorphism** or $0$ is its kernel, which are kinds of **limit** (or **projective limit** in old terminology), but **finitary** ones;

- $B\to C$ is an **epimorphism**, or $C$ is its **image**, which are other kinds of **colimit** property, this time finitary ones.

- the image of $A\to B$ is the kernel of $B\to C$, which combines properties of both kinds.

Now, limits commute with limits and colimits commute with colimits.

The question is whether **filtered colimits** commute with **finite limits**.

Indeed, they do if the category described is by a **finitary algebraic theory**.

I presume that a **Grothendieck category** is like this, though Zhen Lin says otherwise.

As David White says, the interest in filtered colimits arises from the fact that
they are the ones that commute with finitary stuff such as limits in $\bf Set$.

However, this is not a theorem of categories in general.

As Zhen Lin points out, ${\bf Set}^{op}$ does not have this property.
Limits and colimits in $\bf Set$ behave quite differently, as I emphasise in
<a href="http://paultaylor.eu/prafm/html/c5.html">Chapter V</a> of my book,
*Practical Foundations of Mathematics*.

A preorder in which this happens is called **meet-continuous**. See Counterexamples O 4.5 of *A Compendium of Continuous Lattices* for complete lattices that are not meet-continuous.

(I had difficulty with my Internet connection when I originally posted this, so some of the intended text got deleted by mistake.)

I repeat that I am not an expert on homological algebra, but I note that the
<a href="http://en.wikipedia.org/wiki/Grothendieck_category">Wikipedia article on Grothendieck categories</a> says explicitly that "direct limits (a.k.a. filtered colimits) of exact sequences are exact".