Captain Hook is feeling pretty despondent, as it seems that the lost boys have found a mother in the shape of Wendy, which is the very last thing he wanted. Smee doesn't know what Hook's getting at. He doesn't even know what a mother is, much to the astonishment of Wendy, who's watching from a safe distance nearby.
Hook can't find a way to explain what a mother is, so he uses visual aids to help him. When Starkey raises his lantern, Hook and his men can see a Never-Bird in a floating nest. It's then that the Captain takes the opportunity to tell Smee what a mother is. Although the Never-Bird's nest has clearly fallen into the water, she hasn't abandoned her eggs; she's still sitting on them. That's what a mother is: always fiercely protective of her young.
Smee cottons on pretty quickly to what Captain Hook is saying. Now that he understands what a mother is, he comes up with the dastardly plan of capturing the lost boys' mother, Wendy, and making Wendy their own mother. Hook thinks this is a great idea, though he adds a fiendish touch of his own. As well as capturing Wendy, he plans to drown the lost boys.