ALICE is a general-purpose heavy-ion experiment designed to study the physics of strongly interacting matter and the quark-gluon plasma in nucleus-nucleus collisions at the LHC. It currently involves more than 900 physicists and senior engineers, from both the nuclear and high-energy physics sectors, from over 90 institutions in about 30 countries. The ALICE detector is designed to cope with the highest particle multiplicities above those anticipated for Pb-Pb collisions (dN_ch/dy up to 8000) and it will be operational at the start-up of the LHC. In addition to heavy systems, the ALICE Collaboration will study collisions of lower-mass ions, which are a means of varying the energy density, and protons (both pp and pA), which primarily provide reference data for the nucleus-nucleus collisions. In addition, the pp data will allow for a number of genuine pp physics studies. The detailed design of the different detector systems has been laid down in a number of Technical Design Reports issued between mid-1998 and the end of 2004. The experiment is currently under construction and will be ready for data taking with both proton and heavy-ion beams at the start-up of the LHC. Since the comprehensive information on detector and physics performance was last published in the ALICE Technical Proposal in 1996, the detector, as well as simulation, reconstruction and analysis software have undergone significant development. The Physics Performance Report (PPR) provides an updated and comprehensive summary of the performance of the various ALICE subsystems, including updates to the Technical Design Reports, as appropriate. The PPR is divided into two volumes. Volume I, published in 2004 (CERN/LHCC 2003-049, ALICE Collaboration 2004 J. Phys. G: Nucl. Part. Phys. 30 1517-1763), contains in four chapters a short theoretical overview and an extensive reference list concerning the physics topics of interest to ALICE, the experimental conditions at the LHC, a short summary and update of the subsystem designs, and a description of the offline framework and Monte Carlo event generators. The present volume, Volume II, contains the majority of the information relevant to the physics performance in proton-proton, proton-nucleus, and nucleus-nucleus collisions. Following an introductory overview, Chapter 5 describes the combined detector performance and the event reconstruction procedures, based on detailed simulations of the individual subsystems. Chapter 6 describes the analysis and physics reach for a representative sample of physics observables, from global event characteristics to hard processes.