Now duplicate your background layer. On this new layer, choose Effects ---> Distortion Effects ---> Pixelate. Use these settings.
Your top layer should look like this.
click the picture to see the full-size image
Next, go to Adjust ---> Sharpness ---> Sharpen More. Do this 3 times.
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Go to your layers palette and change the blending mode to lighten. This is what it should look like.
click the picture to see the full-size image
Duplicate the top layer so that there are now 2 copies of the pixelated layer and 3 layers altogether. Then merge the bottom 2 layers of the image. have the bottom layer selected, then go up top and choose Filter ---> Distortion Effects ---> Ripple and use these settings.
If it isn't allready, you should should change the blending mode on the top pixelated layer to lighten. This is what your final result should look like.
click the picture to see the full-size image
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