Microsoft declined to submit my application because I took a screen shot of the game which included the actual emulator.
Looking at this answer, the person says that I should us the snipping tool when I have made the phone emulator at 100%. And indeed, the snipping tools spits out an image of that screen at exactly 480×800 which is exactly what Microsoft wants. However, whenever I use the snipping tool, there is still the top black border of the WP7 remaining. I’ve looked at a few images on the Marketplace and other applications have it as well…I think. Some don’t. Can anyone advice me on this please? How I can avoid getting penalised…again.
Will this suffice?

If you update to the Windows Phone 7.1 SDK and Emulator, the new emulator has a built-in screenshot function to take screenshots without these issues.
I have never had my app rejected due to a screenshot taken from the emulator, I can’t say you wont have issues, but assuming everything else in your screenshot checks out; the images from the emulator are the correct size and should be approved.