This tutorial will show you how to fade an image into its pixellated form.  See below for an example.

Open any image of your choice. I'm using the light house shown below as my example.

Duplicate this layer, by right-clicking it on the layers list and pressing Duplicate layer. Alternatively, you can press CTRL+J.

On the duplicated layer, press Filter > Pixelate > Mosaic, and choose '5' as your cell size.

Add a layer mask to this layer (Layer > Add Layer Mask > Reveal all), and using the Gradient Tool with black and white as colours, make a gradient from the middle of the top half, to the middle of the bottom half. This will make th bottom half of the image transparent, revealing the layer below it.

Layer list

You can now minimize this document, as we are going to create an overlay grid for the image. Create a new document 5x5 pixels in size with a transparent background. Zoom into 1600%, and use the Pencil Tool (on 1 px in size) and draw a line on the top, and left side of the document, as shown.

Grid zoomed into 1600%

Now press Edit > Define pattern, and name it Grid. You can now close this document.

Return back to your original image (lighthouse), and create a new layer. Use the marquee tool to select your entire image (right click image, and select

Select All). Now right click your image again, and select Fill. Make your settings the same as below, and press OK.

Fill settings

Reduce this layer's opacity to about 8%. Create a layer mask exactly the same as you did with the pixellated image, and drag the gradient in the same position.

That's it!

Here's my final result