Doing more research old drivers are not working either with java 1.7.0_x.  Will do a bit more research on this issue and see if anyone else has reported a java 1.7.0_x bug with sql servers jtds drivers for sql server 2008 R2.  reassigning issue to myself for further diagnoses...

reference from vikram to help diagnose when the time comes...

Thread [main] (Suspended)    
    SocketInputStream.socketRead0(FileDescriptor, byte[], int, int, int) line: not available [native method]    
    SocketInputStream.read(byte[], int, int, int) line: 150    
    SocketInputStream.read(byte[], int, int) line: 121    
    TdsTlsInputStream.read(byte[], int, int) line: 72    
    InputRecord.readFully(InputStream, byte[], int, int) line: 312    
    InputRecord.read(InputStream, OutputStream) line: 350    
    SSLSocketImpl.readRecord(InputRecord, boolean) line: 927    
    SSLSocketImpl.readDataRecord(InputRecord) line: 884    
    AppInputStream.read(byte[], int, int) line: 102    
    DataInputStream.readFully(byte[], int, int) line: 195    
    DataInputStream.readFully(byte[]) line: 169    
    SharedSocket.readPacket(byte[]) line: 852    
    SharedSocket.getNetPacket(int, byte[]) line: 733    
    ResponseStream.getPacket() line: 473    
    ResponseStream.read() line: 110    
    ResponseStream.peek() line: 89    
    TdsCore.wait(int) line: 4136    
    TdsCore.executeSQL(String, String, ParamInfo[], boolean, int, int, int, boolean) line: 1076    
    JtdsStatement.executeSQLQuery(String, String, ParamInfo[], boolean) line: 465    
    JtdsStatement.executeQuery(String) line: 1304    
    ConnectionJDBC3(ConnectionJDBC2).<init>(String, Properties) line: 409    
    ConnectionJDBC3.<init>(String, Properties) line: 57    
    Driver.connect(String, Properties) line: 191    
    DriverManager.getConnection(String, Properties, ClassLoader) line: 579    
    DriverManager.getConnection(String, String, String) line: 221    
    jTDS_LoginTest.main(String[]) line: 86    

Here is what happens: 

The SSL negotiation goes through and the SQL Server even sends the Environment Change packet (which will never get sent if something goes wrong. This packet is the precursor to everything). 

After that jTDS tries to send an SQL query which I cannot see on the wire and goes for a wait (expecting a response). Now that should not have happened, we should be able to see the query or encrypted form of the payload heading to the SQL Server from our test machine. However we don't. There is something seriously wrong here (or it may be something so plain that we cannot see it).

Still occurs in Ubuntu 64 bit 12.04 with JRE 1.7.0_25-b15 with the latest ADS 13.0.2-4 Build

SSL connections are not enabled on this box. Please work with Ivan to get them enabled & try again