dropped third strike

[wmonroe]

I am a bit confused. Could some one explain the third strike dropped rule. The rule says if less than 2 outs and 1St base not occupied. The ball is live and the batter can advance. Seems like to me this means if there are 2 outs that the batter cannot advance. But, I am being told that just the opposite is so. I am told that with 2 outs it doesn't matter if 1st is occupied or not the ball is live. Where is this defined more clearly. Please advise.