The problem is that the game both says that a creature is constantly looking out for danger in combat, and then doesn't register that combat is very distracting which could allow it. If someone is constantly looking around just in case a Halfling comes out from the bushes behind him or something, he's already had his face smashed in by the guy with the mace who is fighting him. Staying alive and winning a life and death struggle requires focus.
On the other hand, combat also isn't two guys sitting in same space in the same 5 foot squares, either. It's more fluid and facings can and do change, so it's possible that the Halfling might be seen. It just shouldn't be automatic like the game makes it.