The method of preliminary group classification is rigorously defined,
enhanced and related to the theory of group classification of differential
equations. Typical weaknesses in papers on this method are discussed and
strategies to overcome them are presented. The preliminary group classification
of the class of generalized diffusion equations of the form
u_t=f(x,u)u_x^2+g(x,u)u_{xx} is carried out. This includes a justification for
applying this method to the given class, the simultaneous computation of the
equivalence algebra and equivalence group, as well as the classification of
inequivalent appropriate subalgebras of the whole infinite-dimensional
equivalence algebra. The extensions of the kernel algebra, which are induced by
such subalgebras, are exhaustively described. These results improve those
recently published in Commun. Nonlinear Sci. Numer. Simul.