Hi,
It's a knowns bug, I have also met with this previously: CSCef38044
It is not possible to build up OSPF using MD5 hash neighborship with newer IOS versions, on which LLS capability is enabled. LLS capa is enabled somewhere from 12.2T. This behaviour can be found on CVPN from 4.1.5 and above including 4.7 also.
I tested it with several IOS and CVPN OS - same result.The sympthom: router ospf neighborship stays in INIT/DROTHER state.
Solution is to configure the router:
router ospf 1
no capability lls
This will solve your problem.
Attila Suba