Haven't read all the replies, but we have always used time outs, but I really don't like them. I don't think they work.
I am reading a book at the minute called "Positive Discipline" and she has written a companion "Positive Timeouts" - some fabulous ideas in there and techniques for using positive time-outs to diffuse a situation without negativity or punishment.
I bought it at The Book Depository for about $20 I think with free post, so well worth it.