Group nodes by terms How do you group a list of nodes by the taxonomy term?

e.g.

Term 1 
--- Node 1
--- Node 3
--- Node 7

Term 2
--- Node 6
--- Node 9
--- Node 12


I have tried creating a view with "Node" and "Taxonomy Term" as fields. I then enabled grouping, and grouped by the taxonomy term. Doing this outputs the following:

Term 1 
--- Node 1
Term 1
--- Node 3
Term 1 
--- Node 7   
Term 2
--- Node 6
Term 2
--- Node 9
Term 2
--- Node 12


There is a Drupal 6 tutorial here that explains how to fix it, but it doesn't work under Drupal 7. 

It seems like such a simple task, yet after many days of trying, I can't get it to work! I've found many threads of people asking the question, but no solutions (at lease a solution which doesn't involve installing taxonews).
In your view add two fields:
- Node title
- Taxonomy Term

You are right up to here.

Now:


Set the "Taxonomy Term" field to "Exclude from display"
Select your views' format as unformatted list; use "Edit settings" for the format
Set "Grouping Field" as "Taxonomy Term"


For details, view my views' export data in pastebin.