Strictly by the rules, that would be incorrect. Grapplers occupy the same space. From the RotG:klofft said:we knew what square the monk entered the (erroneous) grapple with the hydra, and the lightning bolt didn't travel through it, so I'm content with it not hitting him.
"You share your foe's space when you're grappling. If you and your foe are different sizes, use the larger of the two space entries. Any attack that can reach the shared space can hit you."
The shared space rules can come into play if a larger creature decides to grapple one of your PCs, or when a PC is mounted.(Of course, it doesn't really matter, as this situation won't happen again.)