The #1 seed has only lost 3 times. Seattle losing to Mutombo's Nuggets in '94, Knicks over Heat in '99, and Golden State over Dallas in '07. Technically, the 2 seed won in all three conferences. Howevah...
In the '99 Eastern conference, the Magic and Pacers finished the year tied with the Heat at 33-17. Similarly, the Bucks and 76ers tied for 6th place at 28-22. So, while tie-breakers allocated the 2 seed to the Pacers and the 3 to the Magic, and placed the 76ers at 6 and the Bucks at 7, there was essentially no difference between the 2-7 and 3-6 matchups that year. And while the Pacers swept the Bucks, the 3rd-seeded-but-tied-for-1st Magic went down in the first round to Iverson's Sixers.
Also of note, in both '94 and '07, while the Western #1 lost, both the #2 and #3 seed advanced, and Phoenix was one of the teams in that pairing. Both times, Phoenix lost their second round matchup to the eventual NBA champ (Rockets in '94, Spurs in '07).