Hi guys, I rechecked the circuit last night. I made the following changes to the bread board,

1) Connected unused pins to each other then to ground.
2) Set unused pins to LOW state.
3) Set TRIS registers to output for unused pins.
4) Changed the capacitors on the 7805 to ceramics.

and after this the circuit worked fine. The pulse traced was still there but is was <<1mV which is good enough for me.

I tried the 220uF capacitor but the 7805 and 16F88 started overheating so figured that wasn't a good idea. Maybe 7805 oscillation? The noise is originating from the power source and can be eliminated by using a battery supply.

It was interesting that before grounding the unused pins I measured the signal from them and found that they had a low level sinusoidal output (about 0.3V p-p I think). However when I grounded them it seemed to dampen the interference. So all is good. Thanks to everyone for their suggestions.

cheers

mark.