Further development and additional details and tests of adaptive smoothed particle hydrodynamics (ASPH), the new version of smoothed particle hydrodynamics (SPH) described in the first paper in this series (Shapiro et al.), are presented. The ASPH method replaces the isotropic smoothing algorithm of standard SPH, in which interpolation is performed with spherical kernels of radius given by a scalar smoothing length, with anisotropic smoothing involving ellipsoidal kernels and tensor smoothing lengths. In standard SPH, the smoothing length for each particle represents the spatial resolution scale in the vicinity of that particle and is typically allowed to vary in space and time so as to reflect the local value of the mean interparticle spacing. This isotropic approach is not optimal, however, in the presence of strongly anisotropic volume changes such as occur naturally in a wide range of astrophysical flows, including gravitational collapse, cosmological structure formation, cloud-cloud collisions, and radiative shocks. In such cases, the local mean interparticle spacing varies not only in time and space but also in direction as well. This problem is remedied in ASPH, where each axis of the ellipsoidal smoothing kernel for a given particle is adjusted so as to reflect the different mean interparticle spacings along different directions in the vicinity of that particle. By deforming and rotating these ellipsoidal kernels so as to follow the anisotropy of volume changes local to each particle, ASPH adapts its spatial resolution scale in time, space, and direction. This significantly improves the spatial resolving power of the method over that of standard SPH at fixed particle number per simulation.