A friend on an online forum recently asked me about my rewriting process, and I ended up going on on the subject more extensively that I anticipated. It occurred to me that there might be a few other folks who would be interested in learning more about one writer's rewriting process (I say "one writer's process" because as I mention below, there are a lot of ways to go about it). So anyway, here are my thoughts on the subject, in raw, off the top of my head, un-edited form:
I know a few folks who advocate staring from scratch when you do rewrites instead of tinkering with what you've already got, but I have never been able to work that way. Sometimes I do end up dumping whole sections, but for the most part if I'm rewriting, it's to fix/repair/retool/build on what I've already got.
For me the overall process of writing a novel is like building a body from scratch. I'm not smart enough to see the big picture until I get down the road a ways, so I have to go ahead, see what I can see, and then go back and fill in the gaps.
To switch metaphors, basically what I do is I start with a skeleton and make sure it has the general shape I'm looking for. Then I start adding muscle and flesh and whatever else I feel that the thing needs to be it's best. Inevitably I end up with some fat, too, and I try to find and trim that, but generally speaking, once I have my 'skeleton,' I'm adding ten new words for every one I delete. These are just my un-scientific observations; your actual mileage may vary.
Also, Oliver's point about setting it aside is very good advice. I certainly would never have thought so at the time, but having my original publisher go bankrupt before they could publish my book was the best thing that could have happened. I was able to totally ignore the thing for nearly a year, and I only came back to it when it had been picked up again and I was in the last minutes of my deadline to get it in to them. Coming at it completely fresh, with an entire extra year under my belt, made the final product ten times better than it would have been if it had been published in 2007. I'm not suggesting that you put a book away for an entire year like that -- it's really not practical on so many levels -- but putting away for as long as possible will only help you in the long run.
Another trick I stumbled across in my rewriting efforts that helped me to see the book with fresh eyes without having to set t aside was to change the names of some of the characters. At some point while I was working on the MS, it occurred to me that all of my characters had really white-bread names, so I went in and changed many of them, including small changes to the names of some of the major characters. I hadn't anticipated this, but as a side benefit, when I went back and started working on the book again, it was like looking at a whole new book. I think that when I start my next book, I'm going to seriously consider starting writing it with the characters all named 'Joe' and 'Sally,' and then not decide on their final names until I'm well into the process.
And lastly, I'll also echo Oliver's idea about keeping a notebook handy so that you can jot down ideas as you go. I even kept a notebook with me while I was working on the second half of my novel. I'd be in the middle of writing a scene and it would occur to me that scene X would work even better if I had foreshadowed it in the middle of the book it in scene G, or that based on what was happening in scene Y, the interaction between the characters would need to be rewritten in scene B. Then, when I was done with my first draft, I just used the notebook as my blue print to start building that flesh and muscle I was talking about earlier.
Frankly, though, the most important thing isn't HOW you go about writing your novel -- there are as many ways to write a novel as there are novelists -- but rather that you keep plowing forward. You'll find what works for you as you go along; the most important thing is just that you keep going.