My regrets for using the "s" word. Here we use it to describe what someone being swarmed by mosquitoes looks like.
I've been doing more reading on the AREF as crossroads eluded to earlier, read your blog about decoupling, some forum archives here and on bildr.org, LPF on wiki. One thing I could improve upon is move the cap away from the pot and nearer the input pin on the Arduino.
I will hook the scope up and watch the changes I make to the circuit and see if I'm improving things. I was previoulsly trying to draw conclusions from the serial output.
From looking at the wave, it appears to be 1.75MHz Just wonder what else clocks at that frequency...