I dont know if it is too late to answer but I am just learning about transaction isolation levels in college and as part of my research I came across this link:
Microsoft Technet
Specifically the paragraph in question is:
Lost Update
A lost update can be interpreted in one of two ways. In the first scenario, a lost update is considered to have taken place when data that has been updated by one transaction is overwritten by another transaction, before the first transaction is either committed or rolled back. This type of lost update cannot occur in SQL Server 2005 because it is not allowed under any transaction isolation level.
The other interpretation of a lost update is when one transaction (Transaction #1) reads data into its local memory, and then another transaction (Transaction #2) changes this data and commits its change. After this, Transaction #1 updates the same data based on what it read into memory before Transaction #2 was executed. In this case, the update performed by Transaction #2 can be considered a lost update.
So in essence both people are right.
Personally (and I am open to being wrong, so please correct me as I am just learning this) I take from this the following two points:
The whole point of a transaction enviorment is to prevent lost updates as described in the top paragraph. So if even the most basic transaction level cant do that then why bother using it.
When people talk about lost updates, they know the first paragraph applies, and so generally speaking mean the second type of lost update.
Again, please correct me if anything here is wrong as I would like to understand this too.