Product:
Cognos BI 10.1.1
Windows 2008 R2 Server
Microsoft SQL database

Symptom:
Error message when test data source in Cognos connection for DQM.

Error Message:
Microsoft SQL Server (JDBC) / Dynamic Query Mode
XQE-GEN-0005 Found an internal error: XQE-JDB-0004 A problem occurred finding the driver class “com.microsoft.sqlserver.jdbc.SQLServerDriver”.

Solution:
You need to download and put the SQL Server JDBC type 4 (sqljdbc4.jar) drivers in the D:\Program Files (x86)\ibm\cognos\c10_64\v5dataserver\lib directory and restart the BI server.

You can download the SQL Server JDBC driver from here:
http://www.microsoft.com/download/en/details.aspx?displaylang=en&id=21599

Unpack the files in a empty folder.
Copy the sqljdbc4.jar file to all Cognos BI servers
Place the file in the \ibm\cognos\c10_64\v5dataserver\lib folder.
Restart the BI servers.

Then you can configure the JDBC data source in Cognos Connection.