Adiabatic response time-dependent density functional theory (TDDFT) suffers from the restriction to basically an occupied → virtual single excitation formulation. Adiabatic time-dependent density matrix functional theory allows to break away from this restriction. Problematic excitations for TDDFT, viz. bonding-antibonding, double, charge transfer, and higher excitations, are calculated along the bond-dissociation coordinate of the prototype molecules H2 and HeH+ using the recently developed adiabatic linear response phase-including (PI) natural orbital theory (PINO). The possibility to systematically increase the scope of the calculation from excitations out of (strongly) occupied into weakly occupied (“virtual”) natural orbitals to larger ranges of excitations is explored. The quality of the PINO response calculations is already much improved over TDDFT even when the severest restriction is made, to virtually the size of the TDDFT diagonalization problem (only single excitation out of occupied orbitals plus all diagonal doubles). Further marked improvement is obtained with moderate extension to allow for excitation out of the lumo and lumo+1, which become fractionally occupied in particular at longer distances due to left-right correlation effects. In the second place the interpretation of density matrix response calculations is elucidated. The one-particle reduced density matrix response for an excitation is related to the transition density matrix to the corresponding excited state. The interpretation of the transition density matrix in terms of the familiar excitation character (single excitations, double excitations of various types, etc.) is detailed. The adiabatic PINO theory is shown to successfully resolve the problematic cases of adiabatic TDDFT when it uses a proper PI orbital functional such as the PILS functional.