ok, basically the reference page is just a bit out of date. so you look in _gdmodule.c and find these two bits down about line 1880 or so:

  int xdim=0, ydim=0, i, trueColor=0;

        PyArg_ParseTuple(args, "O!|(ii)i",
            &Imagetype, &srcimage, &xdim, &ydim, &trueColor))
    {

longstory short, here's the deal in python--

256 colors?

im = gd.image((200, 340))

truecolor?

im = gd.image((200, 340), 1)

i know, it's rocket science!