Well, like 3450bob said, the Microdrive is damaged. You are going to have to replace the drive. Microdrives on iFixit.com are about $60. Opening the iPod mini can be difficult if you don't have the right tools, and most likely, will deface the case and top plastics. There are some places that will repair your mini for you, or Apple will have the out of warranty service, but the totals can go into the $100 range.
If you don't want to replace the drive, or send it out for repair, there is nothing else you can do. If you need a new iPod, bring it to the Apple Store and have them recycle it. You'll get 10% off your new iPod.
-Brian