The nursing diagnosis of the health care needs of population groups has been deemed the responsibility of community nurse-administrators. Yet it was not known whether these nurses actually formulate nursing diagnoses pertaining to population groups. The purpose of this study was to describe the diagnostic reasoning of these nurses so as to enable the development of a factor-isolating theory of population group diagnosis using the grounded-theory method. Data were obtained from 31 community nurse-administrators regarding the health services they had created or discontinued within the last three years; it was assumed that these data could illuminate the diagnostic decisions that had preceded service change. The data revealed a first-stage diagnostic process in which the group's state of health was determined. Prior to service change, a second-stage diagnosis was made about the degree of match between the group's need and existing services; the nursing goal was to cultivate a need-service match that would positively affect the group's health status. Labels for the first- and second-stage diagnoses were developed based on the emergent theory and the relevant literature. The resultant factor-isolating theory of community nurse-administrator diagnosis was stated and the implications of the theory for the public's health were discussed.