I am using windows and have boot2docker installed. I've downloaded images from docker hub and run basic commands. BUT
How do I take an existing application sitting on my local machine (lets just say it has one file index.php, for simplicity). How do I take that and put it into a docker image and run it?
Your index.php is not really an application. The application is your Apache or nginx or even PHP's own server.
Because Docker uses features not available in the Windows core, you are running it inside an actual virtual machine. The only purpose for that would be training or preparing images for your real server environment.
There are two main concepts you need to understand for Docker: Images and Containers.
An image is a template composed of layers. Each layer contains only the differences between the previous layer and some offline system information. Each layer is fact an image. You should always make your image from an existing base, using the FROM directive in the Dockerfile (Reference docs at time of edit. Jan Vladimir Mostert's link is now a 404).
A container is an instance of an image, that has run or is currently running. When creating a container (a.k.a. running an image), you can map an internal directory from it to the outside. If there are files in both locations, the external directory override the one inside the image, but those files are not lost. To recover them you can commit a container to an image (preferably after stopping it), then launch a new container from the new image, without mapping that directory.