i think I know the problem. This happened to me when I still modded textures with IMGTool 2.0. I currently use |XF|-MadmaN[AR]'s IMG Toolkit. It is probably the best one to use for bully. It is done thru command line, but still does the job much better since it was MADE for bully specificly. I think he also released a GUI version, instead of commandline only. I use the Bully one now, and my game is fine.
I asked Walter about this problem a while ago, and said i should use the bully one.