Exactly. The don't move, the simply align with the field. The direction the face is based on the direction of the field at the position of the filing itself. Think of each filing as a compass needle that points in the direction of the field at any point.
Unfortunately, iron filings themselves make for a difficult example other than showing the field. You are right, they become magnetized themselves via induction. The actual physics of the situation changes due to the small changes to the field. However, a sufficiently strong magnet will override any field cause by the filings themselves. Also, remember that the filings are each a "bar magnet" if you will and have a north and south pole which of course point toward each other (via attraction) which tends to cancel out many of the first order effects of the filings.
Your assumption of the filings moving and forming into lines however is incorrect. If you look closely, the filings don't all lie on a line, but simply close together. You're assumption of the effects that the filings have on each other is good though and this tends to cause the "gaps" you often see in pictures of magnets and filings (such as here.
You are also very correct in what you see is actually the OPPOSITE of what the "lines" themselves are doing. As the strength of the field increases, the "lines" get closer together while far from the magnet the lines are further apart. This is evident in the picture in the link above.
Also, you could set up an experiment where you had say some number of filings spread out nearly uniformly (as much as possible). When the magnet was applied, the filings would "spin" and align with the field (magnetic and the induced field). If you took a picture and did the experiment again, you would see a completely different "view" of the filings.
Good call... I'd give you an 'A' :)