Try this.  Instead of trying to couple PSP and DXTBmp, it would be a better idea to simply:

Open the relevant image in DXTBmp.

Save a copy of the actual image.  Save it somewhere other than the original folder.

Now save a copy of the alpha channel.  Again, somewhere other than the original folder.

Now open them in PSP.  Edit them, save them, then recombine them and save in another folder.

I have always found DXTBmp a little hard to use if you are using PSP as your editor, since PSP takes so long to load.  So I began to start up PSP before I opened anything in DXTBmp and would just transfer when I saved the images.  Works pretty well.

I don't do a lot of repainting myself but I've never had a problem using DXTBmp in conjunction with PSP or any other graphics editor. There are several different methods but this is the way it was intended to work.

Run DXTBmp & set PSP as your editor.
Select/open the texture you wish to edit.
Double-click on the main texture to send it to PSP.
Edit the image & click "File/Save" or click the Save icon on the toolbar. (Alternatively you could exit PSP saving changes on exit.)
Back in DXTBmp click "Image/Reload after Edit" to load the edited texture.
Now repeat the procedure for the Alpha Channel. This time click "Alpha/Refresh Alpha" to load the edited Alpha Channel image.
Finally, "File/Save As/Extended Bitmap" in the appropriate "with Alpha" format. Make sure you use the correct file name to the correct location.

It's a good idea to save a copy of the original texture in the native format of the graphics editor you're using. In this case the .psp format. All editing can be done using this texture as a master copy rather than continually converting repainted Extended textures which inevitably reduces the image quality. Use the Layer feature of PSP to edit on top of the original texture. Saving in the native format will retain all the layers intact. Once you get used to the idea this makes it so much easier. When you wish to convert the finished image into a texture Save As from PSP in BMP format & open it in DXTBmp. You can import the Alpha Channel separately. Saving out in the appropriate format will automatically convert it.

PS. Unless the existing model has reflective textures it's unlikely you will be able to add them. The reflective properties are defined in the MDL file. Not all aircraft have this feature.

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My video card doesn't support reflective textures so I've never been able to use the feature myself. If the original version of a particular aircraft doesn't already have reflective textures I very much doubt you can add them.

So, if an aircraft does'nt have reflective textures will it appear blurred?? Most of the repaints which i downloaded appear blurred and i can't figure out how to make then crisp. So i thought of adding reflective textures so that the aircraft no longer appears blurred. Is that the solution ???

Thanks a lot you guys,
Finally i have solved the problem. It was the mip maps due to which the textures appeared blurred.
Thanks once again.