Sony and Japanese broadcasting company NHK have developed a prototype of a 1 inch micro drive with 10GB capacity.

The 10GB drive is also slimmer than currently available micro drives. It only measures 2.5mm.
It uses perpendicular recording technology that becomes rather popular right now. See Hitachi explaining perpendicular hdd recording.
I like Sony's approach of developing new ground breaking technologies with partners and the be able to offer consumer electronics that others have a hard time copying - see Cell Chip.
More details on ComputerWorld. Story via Prylfeber.

Update:
Toshiba is apparently working on a 40GB 1.8 inch microdrive and Hitachi plans a 20GB 1 inch drive in 2007. More details on Forbes. Story via My Gigabeat.
So the 10GB Sony microdrive does not sound that impressive anymore.

The highest capacity microdrive on the market right now is the 6GB Hitachi.