They all do it. Your 3 1/2 year old, my 3 1/2 year old... I'm told it will pass, and I believe it. I see improvement every day, and soon you will too.
First, don't be afraid that this 'other' side of your child is the personality he'll become. It's not. He's going to turn out just fine, especially because he has a Mom who cares.
He may not be feeling well. This has turned out to be a common cause of my child "acting up". Are you allowing him to skip naps, or are they not at consistent times of day? Not enough sleep will do it! Or maybe he's got a cold, stomach problems or even allergies?
Some say to let the child skip the apology after time out. Maybe you should try it, considering he's done his time - and making him apologize is just another thorn in his side. Integrate it back into process later.
Kids his age can't yet control their anger. Be careful to control how angry you get, including your facial expressions. I am not a spanker, and have to rely on my tone of voice and expressions to convey the degree of trouble my child is approaching. Recently, I realized that when my son gets angry, he is loud and stern-looking because that's exactly how I appear. I am careful to appear genuinely calmer now.
I've learned too that the loss of toy privileges and other groundings don't work on a 3 1/2 year old.
For now, Time Out is probably your best tool - though you may have to physically hold him there until he realizes it's better to do the time without a fight. But, soon... grounding will seem like the end of the world! Here's to that day!