In a regular mod, each file has to contain all the information. In a modular file, you only include what is changed.
Example :
You wish to add a new unit - the Munchkin Warrior.
In a regular mod you take the full CIV4UnitInfo.xml and add your new unit to it.
In a modular mod, you make a new file Munchkin_CIV4UnitInfo.XML that contains just the information about the Munchkin Warrior.
There is a bit more to it than that (more files involved, somewhat different directory structure, etc).
For a single item change, it doesn't really make a difference. The big difference is when you are merging multiple mods together. Sticking 2 regular mods together can involve lots of file comparisions to find all the changes and properly merge them. For XML only modular mods, it is a simple matter of sticking both in the same mod folder.
