You had not enough frames. Your model shrinks because vertices move along straight lines between frames. If you had only two frames it would even shrink to a single point.
BTW why dont you rotate it with a script?
Re: simple rotate animation in MED
[Re: Tobias]
#290617 09/20/0912:0109/20/0912:01
And I don't rotate with script because the wheel is one of many enemies (yes it is) which have all the same action so it's the easiest way to make a walk animation for all of them.