An Agile iteration is a short one to two week period where a team takes a couple of their customers most important user stories and builds them completely as running-tested-software.

This means everything happens during an iteration. Analysis, design, coding, testing. It all happens here. The beauty of working this way, is every couple weeks the customer gets something of great value (working software), but it's also a great way to track progress (measuring the rate at which the team can turn user stories into production ready working software).

Click here for a short video on Agile iteration mechanics.

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