You might want to try something with more insulating power than paper towels-- it's critical to getting accurate readings of the beer temperature. I use a cotton hand towel, folded a few times and taped tightly against the temperature probe. Also, the probe must be taped securely to the side of the carboy to ensure good contact.
In the past, I've used a thermowell, but it's too much fuss. I have the same controller you do and use it on my Better Bottles.
On Deck: Jamil's Vanilla Robust Porter
Fermenting: Orange Blossom Mead
Kegs: Element 56 Pale Ale, Ron's Belgian Blonde, Summer'n Saison, Furloughktoberfest '09, Grateful Pale Ale, Sam Adams Cream Stout Clone, EdWort's Apfelwein