Please try using this CVS snapshot:

  http://snaps.php.net/php4-latest.tar.gz
 
For Windows:
 
  http://snaps.php.net/win32/php4-win32-latest.zip



Use your original configure line, but don't pass '--with-gd' any path. (This will make it use the bundled GD library)

If this fails too, please provide a short example script
which can be used to reproduce this.

OK, we downloaded and compiled the snapshot as recommended..

Then we made this test script and called it like this:

http://<SERVER>/php/testTrueColorImg.php?asd=test.png 

so that I.E would see the .png at the end of the URL (seems to help it understand that this is a png better sometimes)
-------
<?php

// create the image
$image = ImageCreateTrueColor(200,200);
$bg = ImageColorAllocate($image,0,0,0);
$tx = ImageColorAllocate($image,255,128,128);
$white = ImageColorAllocate ($image, 255, 255, 255);
ImageFilledRectangle($image,0,0,200,200,$bg);
//ImageString($image,3,70,90,"it works !",$tx);
ImageTTFText ($image, 20, 0, 10, 20,$white, "/homespace/geneport4/fonts/Arial.ttf","Testing...");
// send the image
header("content-type: image/png");
ImagePNG($image);
?>

-------
It seemed to help the text look a little better, but not as good as it does with an 8-bit image.  

Another note, the image appears to look better in IE 5.5 than it does in I.E. 6.0.sp1 but this may just be related to that fact that we tested this on different computers/monitors.

I would also like to say that we found another way to bypass this issue.  

The color space problem comes up when we superimpose (imagecopy) different images together dynamically - we are adding button images to a 8-bit background image.  

We are able to avoid this issue by limiting the color table size for each image involved.  This solution should work for most cases.  

Still, problems would arise if:

1) we need to combine multiple images with non-overlapping, large color tables
2) the quality of the base image requires the full 256 colors to look decent

This stuff is all fixed in the bundled version of GD in PHP 4.3.  Use --with-gd  without any path when you build 4.3.