There are a total of nine life bottles in the game. A life bottle is an extra life (300 hit points) that is used automatically whenever Dan loses health to 0 HP. If you fall into water or lava then however much life you have left is reset to zero, and a new life bottle is used to bring you back up to 300 HP.
If you run out of health and have no life bottles left, the game is over.
This is in Dan's Crypt, and is almost impossible to miss. It is on a rock at the end of the crypt next to the Star Rune holder.
This is in the Cemetery. About halfway through the level, there is an angel statue that you can hit with your sword. When you do, it rotates 90 degrees, and opens the gate that it is pointed to. Hit it with your sword until it opens the gate opposite to the one that holds the chalice. Through there is gold and a life bottle.
This is rewarded for gaining your second chalice. Talk to Canny Tim and he will give you a life bottle. The earliest you can get this is after completing the Cemetery Hill level.
As soon as you have a club in your inventory (the hammer or the daring dash ability will work as well) go back to Dan's Crypt. There is a different colored square in the wall on the left side of the screen from your starting position. Hit it with the club a few times to break it (or hammer, or dash against it). Go through to collect the life bottle.
This is found in Scarecrow Fields. Play through the whole level until you pass the fifth and final industrial machine trap. To the top-right of this is the exit and to the top-left is some gold and a harvester part. Collect this part and return to the corn field.
In the corn field is a stone building that you can get into by moving a purple cart out of the way. Push the bale of hay to jump on top of the wooden upper floor and hit the switch with your weapon. The harvester drops. Go up to it and use the harvester part, then go through the hole and new path it creates to collect a life bottle and gold.
This is in the Pools of the Ancient Dead level. You will come to a door that needs the Chaos rune to open. Go through the door and to your right there is a small island that you'll need to jump across to get the life bottle.
This is awarded for collecting 16 chalices.
This is awarded for collecting 19 chalices.
This is in the level The Time Device. Go to the right side of the master time clock and approach the butterfly gate. Set the master clock in the level to this time. Go through the door to get the final life bottle.