The screenshot app is an application that enables the user to take screenshots or pictures of the screen of their O2. The pictures are saved as PNG files in the /pictures/screenshots/ folder. The screenshot zip folder actually comes with three applications. Screenshot, just like the app i described above, Clearcache; because of a bug in the firmware of the o2 you can not see your pictures on your O2 until you connect via USB to your computer. Alternatively you can use the clearcache app, which clears the O2's internal file cache and thus allows you to view your pictures. The third app found in the zip folder is the screenshot-noexit app. This application allows the users to take screenshots of other user programs. The screenshot app does not.
To take a screenshot use either the screenshot-noexit app or the screenshot app once you select one of these click both volume buttons at the same time to take a screenshot. The LED will turn green, this is just showing that screenshot is being saved. Also, if your O2's brightness is low enough (around 1) your screen will flash.
These apps are available for download here.