From reading your message, it seems like the Time Outs just aren't working and aren't an effective disciplinary tactic for her. I can't give you recommendations on what is because I don't know your daughter, but we've found them to be completely ineffective in our house with a recently-turned-2 year old and an almost-4 year-old older brother.
He's getting to the point he understands the concept, but our daughter just doesn't comprehend the cause and effect of poor behavior and sitting on a step or in a corner.
If she were my child, I'd probably take the following approach:
Give her something to look forward to each day - spending one-on-one time with you or Daddy, a special treat (watching a show, going to the park, a snack, whatever motivates her), and explain that if she's good all day and acts like she should, she'll get her treat. If she doesn't, she loses her treat for the day.
We all know as adults that we'd rather be told what we're doing well vs. what we're not doing so well - there are all kinds of books regarding corporate management and reinforcing good behavior. But, as adults we've had a lifetime of learning right vs. wrong.
That being said, we've started really trying to focus more of our energies on telling our kids how well they're doing things (praising when they use nice manners such as "may I please be excused?", "may I please have a sip of your drink?", etc) and not being as imbalanced with only negative attention. It takes a lot of effort and attention to your own actions and behaviors.
I'd also get her as involved as possible in what her sister is doing. Our kids are 21 months apart, and we had our son help with diaper changes, helping to encourage his sister use a walker, crawl, etc. He'd help pick out her clothes and his.
I'd also perhaps recommend giving her some responsibilities - minor ones like picking out what clothes she wants to wear (from 3 different options), picking her shoes, helping make her bed, etc. And, really commend her.
My kids are certainly not perfect (nor are we as parents). We have many moments of sheer frustration, but these are just a few pearls of wisdom we've picked-up recently that seem to be helping.
Good luck!