Here is my XML. Maybe you can see something I didn't.
Note that I am keeping the actual kfm in a different folder than my actual model because I intend to share the kfm between several models and want to keep the file size down. But that was newer a problem before as long as I keep a copy of the nif in my kfm folder which I do. And it is what every non custom unit does. The upload I made was of the kfm folder (it has a spare nif in it as presented).
So to duplicate my setup just put that folder as the KFM folder and make a separate folder with just the nif. You will end up with two folders that have a nif and one that has both the nif and kfm.
Also, the Modules/NormalModules thing is because it's a module for RiFE.
Code:
<UnitArtInfo>
<Type>ART_DEF_UNIT_FRIGATE_KHAZAD</Type>
<Button>Art/Interface/Buttons/Units/Tradeship.dds</Button>
<fScale>0.2</fScale>
<fInterfaceScale>0.5</fInterfaceScale>
<bActAsLand>0</bActAsLand>
<bActAsAir>0</bActAsAir>
<NIF>Modules/NormalModules/PPQ_NAVY/Art/civs/KHAZAD/Units/Ships/Frigate/frigate_split.nif</NIF>
<KFM>Modules/NormalModules/PPQ_NAVY/Art/animations/Steam_Frigate/Frigate.kfm</KFM>
<ShadowDef>
<ShadowNIF>Art/Units/01_UnitShadows/FrigateShadow.nif</ShadowNIF>
<ShadowAttachNode>BIP Pelvis</ShadowAttachNode>
<fShadowScale>1</fShadowScale>
</ShadowDef>
<iDamageStates>4</iDamageStates>
<TrailDefinition>
<Texture>Art/Shared/water_ship_wake.dds</Texture>
<fWidth>1</fWidth>
<fLength>180</fLength>
<fTaper>1</fTaper>
<fFadeStartTime>0.2</fFadeStartTime>
<fFadeFalloff>0.35</fFadeFalloff>
</TrailDefinition>
<fBattleDistance>0.35</fBattleDistance>
<fRangedDeathTime>0.31</fRangedDeathTime>
<bSmoothMove>1</bSmoothMove>
<fAngleInterpRate>720</fAngleInterpRate>
<fExchangeAngle>25</fExchangeAngle>
<bActAsRanged>0</bActAsRanged>
<TrainSound>AS2D_UNIT_BUILD_UNIT</TrainSound>
<AudioRunSounds>
<AudioRunTypeLoop>LOOPSTEP_OCEAN2</AudioRunTypeLoop>
<AudioRunTypeEnd>ENDSTEP_OCEAN2</AudioRunTypeEnd>
</AudioRunSounds>
<SelectionSound>AS3D_UN_OCEAN_END1</SelectionSound>
<ActionSound>AS3D_UN_OCEAN_END1</ActionSound>
</UnitArtInfo>