Method
Iterative design is a design methodology based on a cyclic process of prototyping, testing, analyzing, and refining a product or process. Based on the results of testing the most recent iteration of a design, changes and refinements are made. This process is intended to ultimately improve the quality and functionality of a design. In iterative design, interaction with the designed system is used as a form of research for informing and evolving a project, as successive versions, or iterations of a design are implemented.
Source: "Iterative Design." Wikipedia.
Process
The Pentaho Wiki defines an Interative Design Process in 4 steps: Identify, Prototype/Build, Analyze, and Refine.