The results of detailed analyses of the samples discussed in part I are reported. The chemical, morphological and microstructural changes which occurred during moist curing and soaking have been determined using thermal analysis, X-ray powder diffraction analysis, and scanning and transmission electron microscopy combined with EDAX. The analytical resultS together with the physical observations have shown that the period of volume instability and swelling coincides with the period of gypsum consumption and ettringite formation. However, swelling is not caused by growth of crystalline ettringite but is the result of water absorption. An osmotic mechanism is proposed in which concentration gradients are generated within a surface colloidal layer on the clay particles. Ettringite rods nucleate and grow within this layer and C-A-S-H gel is produced in the areas between the rods. This results in concentration gradients at the clay particle surfaces which provide the driving force for osmosis. The implications of these findings are discussed in relation to lime-stabilization of soils.