We begin by reviewing progress on diffractive hard scattering in QCD. Motivated by HERA data on the scaling violation in diffractive DIS, we then discuss the possibility that relatively small parton transverse separations, of order 1 GeV-1, dominate the physics of the diffractive gluon density. We consider implications for diffractive final states, and present results for jet cross sections in diffractive ep collisions to next-to-leading order.