On2, which rapidly releases new spec generations, is currently at VP8 and this is supposed to compete with h.264. AFAIK no one has seen an actual VP8 encoder released to the public, so the comparativ quality is unknown.
The secret about vido codecs is that the implementation and ongoing optimization is more important than the spec itself anyway. Just look at how far XVID has come despite being based on a 10 year old standard. Similarly, Theora was based on VP3, but it is extremely tuned and updated to this day. So Theora is already closer to h.264 (although not on par) than anything from On2 up to VP7 at the moment. VP7 was comparable to h.264 when the h.264 implementations sucked (circa 2005), but so was XVID! since then h.264 implementations, especially x264 has made strides, eclipsing VP7 (and XVID etc).
The moral of the story is that even if VP7 is made open source, it is only comparable to Theora quality anyway, I doubt there is enough room for improvement in that spec to compete with h.264. VP8 probably has more potential, but all we have ar On2's claims and (biased) demonstrations so far. VP8 open sourced + Google pouring in development effort could produce the breakthrough in 1-2 years, who knows.. But nothing from On2 is the holy grail ATM.