Thanks for that Rob. I will try what you have advised. From the sound of what your saying I think the chip is probably the cause. I have measured the current drawn from the motors and under no load is 0.20 amps.
Also I have looked at you 5v regulator circuit and by my calculations a 1K ohm resistor is required in series with the LED to produce a 5 volt output.
This was based on:
12volt (supply) - 2 volts (voltage drop across LED) = 10volts
divided by 10mA current

10/10x10-3 = 1000 ohms
is this correct?

Once again, thanks for your help.