I'm trying to re-create Report 1 (see below): The problem is that report builder creates a row for every possible value (see Report 2 below). How can limit each group to only display values for that group?
What does your data look like from the database? It looks like that would be a good use for a Matrix object. If your data supports that then that would be the way to go rather than a table with grouping. If you use a table with grouping, you will probably have to do complex show/hide sections for each group and that will get ugly.
That is based on rather outdated experience with SSRS and it is possible more recent versions handle that better.
If your data supports it, read on the Matrix object and see if that fits your needs. I know it can do grouping within the column headers and recreating that report exactly is well within the capabilities of SSRS.