Think about it this way:

The Horde is based on Kalimdor. Sure, the Undead and the Blood Elves are on the Eastern Kingdoms, but they are relatively few compared to the bulk of the Horde (Orcs). The Orcs are already a pain in the Night Elves' butt due to their capital being so close to Ashenvale, the ancestral home of the Elves, and the whole Warsong Clan issue.

The Night Elves also lost a huge number of their own in the Third War, not to mention losing their immortality. It was a huge trauma for such a proud race, being left alone in an increasingly hostile world (Felwood is a cesspool, Ashenvale has corrupted places, the animals are also hostile). They had found friends in the Third War when fighting alongside the humans and dwarves of the Alliance, and there would be no way in hell they'd align themselves with the Horde.

So they sided with the Alliance. They are still reclusive and no one in the Alliance really trusted them too much in the beginning. But they are officially part of the organization, and are pictured in WoW as such.