devkitPro

A sample of the code is visible on the code editor in the screenshot.
http://img6.imageshack.us/img6/4405/halpp.png
The sprite is an 8bit 256x192 png file.

We fixed it, we moved line 73 to 83 and that seems to have fixed it. Any ideas why ?

Your dma to sprite palette memory is 32*32 bytes (1024 bytes). Sprite palette memory is only 512 bytes (256 colors) so the dma is overwriting the 512 bytes following sprite palette memory...which happens to be background palette memory. This is why re ordering the dma appears to fix the problem.