I think that they both died some way. I'm going to wait until Deception though.

I think Quan Chi survived and Shang Tsung is either dead, or incapacitated.

I think they're both alive. Either that or one of them is dead whilst the other has taken the Dragon Kings army.

Here's a possible story if they are alive.

The Deadly Alliance have successfully revived the Dragon Kings army, but now they are seperated after their attempts to overthrow each other failed. Quan will have the DK's army and Shang will be in hiding and Quan could be on a rampage trying to destroy the relams. The Dragon King will find out that Quan has his army and take it from him, probably kiling Quan or forcing him to serve him or die. Quan can inform the Dragon King of Shang Tsung and also of Quans own alliance with the Red Dragon. Shang can become a hunted fugitive or something whilst the Dragon King uses Quan and the Red Dragon to enact his plans on Earth realm.

Quan chi can't be killed by anybody other than scorpian. they have too much history. it makes me think though, what will scorpian do after quan chi is dead?

I think they both survive.

They are succesful in reviving the Undefeatable Army, but at the same time, the Dragon Kings awakens.

The army doesn't listen to the bearer of the amulet anymore and both Quan Chi and Shang Tsung are forced to flee.

After that, I think Quan Chi will try to ally himself with the DK and perhaps even offering him the sacred amulet (a copy ofcourse :)).

Shang Tsung will go into hiding I think after his plan to try and kill Quan Chi with the two Oni has been revealed.

I really hope that one of them comes back in MK:D (preferably Quan Chi).