Follow these instructions:

• HSQLDB is a very simple database to configure as you don't need to install nor to start it before being able to use it. It comes as a single JAR file named hsqldb*.jar. If your XWiki WAR doesn't have it in WEB-INF/lib you'll need to download it and copy it there. You can download it from the HSQLDB web site or directly from the Maven Central Repository.
• Once this is done, you need to configure XWiki to use HSQLDB and to tell it where the database files will be created. To do this, edit the WEB-INF/hibernate.cfg.xml file where you have expanded the XWiki WAR file and uncommented the HSQLDB part.

Other optional ideas

• You can use a remote HSQLDB database instead of embedding it. To do this, just use a URL like jdbc:hsqldb:hsql:HOSTNAME... instead of the jdbcc:hsqldb:file:.. URL. The major version of the hsqldb jar file must match the major version that the HSQLDB server is using.
• If you want to use your app server facilities to manage your data sources (generally a better strategy), then you must follow these steps:
  • Put the hsqldb*.jar file into your app server class path instead of in your web app (like in $CATALINA_HOME/common/lib)
  • In hibernate.cfg.xml, use the following settings in place of the HSQLDB block in the sample file. Specifically, do not set the url, user, etc. here and leave the provider_class unset (i.e. use the default value), since XWiki's implementation does not handle container-managed data sources:
    <property name="connection.datasource">java:/comp/env/jdbc/xwiki</property>
    <property name="dialect">org.hibernate.dialect.HSQLDialect</property>
  • the final step is to manage the data source using app server facilities. With Tomcat, for example, you would map the resource link jcbc/xwikiDs to a container-managed data source using the Admin web app or by editing the file conf/Catalina/*/xwiki.xml (i.e. webapp-name + ".xml").