I also have a link to the mobilesync directory on a second drive (not enough room on the SSD C: drive for all of this crap), and I'm having the same problem, error -1303 when trying to back up the iPad before updating to iOS 5.
I ended up just clicking "Cancel", creating my own backup, moving the backup to a subdirectory (as a safeguard), creating another backup (again, safeguard, I've been burned in the past by not doing this), and finally updating to iOS 5. When it prompted I just told it to go ahead and erase the iPad, and when it was done updating I restored from the backup I had made by hand. Worked without a problem.
Apple really needs to get their backup situation sorted out, it is absolutely pathetic. I have updated the firmware on my iPad about 4 times, and EVERY SINGLE time it has errored out halfway through, leaving me with a blank iPad running the new firmware. Luckily I've gotten in the habit of backing it up by hand before updating the firmware, so I can just restore after it fails. Unfortunately the last time I did this, it failed during the restore as well, which left me with a still-blank iPad, BUT it had already registered the name of the iPad on the unit, which means after the restore failed and I closed and re-opened iTunes to try again, as soon as it detected the iPad it backed it up automatically, erasing my real backup that I had been trying to restore from with the backup from the blank iPad.
It's quite possibly the most laughable backup system I have ever encountered...a user should not have to use low level system utilities to create hard links to other drives so they can actually back up their device (since there's no way to set the location of the backup in iTunes), and a user should also not have to manually back up their backups so iTunes doesn't freak out and erase the ONLY backup that it maintains with no warning.
I sure hope they've fixed some of this in the new iTunes, but judging by this -1303 error, it looks like they might have actually made things worse than they were before, if that was possible.