Is your son speaking well yet? I'm just curious, but if he's not able to communicate, he may be frustrated, too, because he's at an age where he has desire to speak but doesn't have his words yet. If this is true, try some baby sign - there are lots of books - or speak to your doctor about a speech pathologist.
If he's on target with talking, maybe it's the method of the time out? Make certain he's not getting attention from the other child or you - no eye contact, talking or attention of any kind! Trust me, I know this is hard to do with another kid in the room.
Also, if the time out doesn't seem to affect any alteration in behaviour, perhaps you could take toys away, especially the one he hit with. While you're doing it use calm words to explain why you're taking the toy away. He may just pick up another toy and do it again, and you can continue to take the toys away until there's no more ammunition. I have done this with my son until he had NOTHING except a bed and covers, but he learned. Then it was a toy time-out for so many minutes (1 per year of age).
Good luck!