Tested with the 2.8 release, issue is still present.

Can it be .Net specific, or Windows Server specific?

This code works as expected in Java binding on Win7 x64:

driver.get("http://webdesign.about.com/od/examples/l/bl_input-tag-examples.htm");
assertFalse(driver.findElement(By.name("checkbox-un")).isSelected());
assertTrue(driver.findElement(By.name("checkbox-ch")).isSelected());

I tried this on a Windows 7 box with the 2.8 .Net bindings and Firefox 6.0, and element.Selected
returns true when it should.

Looks like this is a Windows Server specific issue.

Do you need clarification on something from me?

No clarification needed, we'll try to fix this when we get a chance (or, if you have
the time/motivation, we're always receptive to patches!)

In the mean time, ((JavascriptExecutor)driver).executeScript("return arguments[0].checked",
element); may help you out as a workaround.

One more thing: please check the sample (that works right on Win7) on your 2008 Server
box to make sure that it is OS-specific issue:

driver.get("http://webdesign.about.com/od/examples/l/bl_input-tag-examples.htm");
assertFalse(driver.findElement(By.name("checkbox-un")).isSelected());
assertTrue(driver.findElement(By.name("checkbox-ch")).isSelected());

The sample you provided worked perfectly on both systems - but my sample still does
not; I did some more digging and found the issue:
Often checkboxes and radio buttons are wrapped in labels:
<label><input type="checkbox"/>I'm a checkbox</label>
(they are wrapped in labels so that clicking on the text selects the checkbox/radio)

I was referencing the label instead of the input node, hence, the click action was
selecting the checkbox , but element.Selected returned false (because the label node
isn't selected - the input node is).

Sorry about the false positive, will you mark this as resolved?  I can see this being
of use to others who run into the same problem.

Thanks for taking the time :)

element.isSelected() is always returning false. Checked on both IE8 and FF8

I am not trying to select the label. Instead I am trying to check whether the checkbox
is checked or not. I am using the xpath //table[@id='ws_widget_Checkbox_0']/tbody/tr/td/div[@class='mainSprite
chkBox']

Selenium version: 2.13
OS: Windows XP 32 bit
Browser: Firefox
Brower version: 8

You are referencing a <div>, not an <input>, WebDriver only recognizes checkboxes made
with <input type='checkbox'> tags.

Thanks andersly, Fixed the test script accordingly. It's working now.