"What could be wrong with my power supply?"

Many. Heating of regulators; EMI etc

Your ac input volts must atleast be 9V ( with full working load ) for effective functioning of the 7805. And while on this, anything more ALSO could spell trouble as it is likely that the 7805 is getting heated up with higher dissipation : ( Input dc V - 5 )x load Amp, must be less than that permitted for the 7805 mounted on recommended heat sink.

What is the value of the smoothing capacitor ? The rough guideline is 1000 mirco Farad for every Amp of DC load.

"now that i cannot use battery pemanently what steps should i take ??? "

Try with a good branded power supply instead of the home brewn one, from a mains socket that has a good earthing.

Raghu