query_posts loop through taxonomy and posts separately

Hi, I have a custom post type with a taxonomy and several categories, with posts saved to each category. I want to create a page template that loops through the categories in turn, listing each post, like this:

<h3>Custom Category One</h3>
<ul>
<li>Custom post 1</li>
<li>Custom post 2</li>
<li>Custom post 3</li>
</ul>

<h3>Custom Category Two</h3>
<ul>
<li>Custom post 4</li>
<li>Custom post 5</li>
<li>Custom post 6</li>
</ul>

I can use query_posts to fetch all the custom posts and spit them out in one long list, but how do I loop through the categories one by one? Thanks in advance.