yeah, but i believe arcade is pre-loaded with some games. also, I will need space for game saves..

You can use your own USB drive for game saves (If you have one...)

GRID has unfortunately no splitscreen multiplayer :(

How about Overlord or Beautiful Katamari ?

Soon, Tales of Vesperia.

The Burnout games are pretty casual.

Beautiful Katamari's dual player is terrible. Don't...

One of the best casual games in my opinion would be the Lego Series. Lego Starwars and Lego Indiana Jones are fun and easy to play. They are co-op same screen and no-one ever truly "dies".

As mentioned above, Earth Defense Force. It's a bit cheesy but it is really fun playing split screen co-op and on Easy, it's a walk in the park.

The last thing you *might* consider is to watch for a 20 gig hard drive on Ebay or Craigslist and see if you can find one for 20-30 bucks. You can then download demos from XBLA for every game on there and find some that will be great in co-op.

Halo 3 is local co-op and on "Easy" is also a walk in the park and a lot of fun to play.

Rainbow 6 Vegas is a good co-op.

My favorite "Pick and Play" shooter is actually on XBLA and is called "Assault Heroes". There is a II now as well. It's an overhead, modern version of Ikari warriors and is completely co-op. For an XBLA game, the graphics are awesome.

Is there a particular Genre you are looking for?

I don't know what your definition of a casual game is, but that is definately not one of them.

 tales of Symphnia was casual, Tales of Legendia was casual, Abyss and the World were casual. The combat system is easy to jump into, the game is relatively easy with more then 1 person playing. Why wouldn't it be casual?

Yes maybe to the average RPG player, but to somebody that doesn't play games let alone RPGs it is probably difficult. Also Tales of Vesperia was described as alot harder, and in the demo it took me 3 times to beat the boss, so I guess its only easy to a few people. Also the controls are probably very confusing to somebody who hasn't really played too many video games. This is without mentioning the length of RPGs, and how you have to play for hours to actually acheive something. So casual is much more than difficulty. Maybe its an easy game, but that doesn't mean it its casual.

If my memory serves me correctly, you can install the smaller arcade games on the memory card, no? Also, you don't have to pay to download stuff. You sign up for a Silver (free) membership on LIVE, and you can download all free content (demos, trailers, some free DLC for games, etc). Nonetheless, this list only contains Disc based games:

Lego Series (Batman comes in September)
Viva Pinata (1 and 2 - 2 in September)
Earth Defense Force 2017
Gears of War
All Halo games
Marvel Ultimate Alliance
Eternal Sonata
The Simpsons Game
Scene It!
Dance Dance Revolution
Rock Band
Guitar Hero
Lips (this fall?)
Kameo
Perfect Dark Zero
Beautiful Katamari
Dynasty Warrior Series
Pirates Vs Ninjas Dodgeball

You could also find someone who has a 20gb and is looking to upgrade, maybe they'll give you a good price. Then you'll have a much wider selection on XBLA.