Is it actually possible to produce the intermediate matrix? I've always thought that Mathcad can only produce the final one.
Mathcad will produce whatever you program as return value in your iteration function. You can nest matrices and vectors, so when each iteration step results in a matrix, you could put this matrix as element in a vector and do the same with the subsequent iteration steps. The return value of the routine would then be this vector consisting of a number of matrices. In your case this might not be the best idea, though, as you obviously are working on memory limits. Actually I wonder why because a 1000x1000 matrix is not that huge. You should be able to create quite a lot of them and do operation with. I just created 10 1000x1000 matrices with random values and by multiplying one with the other without any problems (and with just 1 GB of RAM). And now I have created a vector consisting of 200 1000x1000 matrices and still no memory problem.
But we sure would have to look at your sheet to be (hopefully) able to say where the memory is used up and what could possibly be done more memory efficient.