I've heard of a couple ways to deal with this.
I read about a 3-step method in a book by the Super Nanny (Supernanny: How to get the best from your children) that was effective with my kids.
First off, the book was a fun read and I stumbled on it at my local library (my toddler was randomly pulling books off the shelf and bringing them to me, and this happened to be one!). You should pick it up if you can!
Anyway, the example she used was with hitting, but the first response is you look the child in the eye and say firmly, "No hitting." Then let them go back to their playing. The next time you say "If you hit, you will go to time out (or the naughty step, or the playpen)" Then the third time (because there will be a third time...) you don't say a word, you just follow through with whatever action you said would happen.
I honestly didn't think this would work, but I did it just to see. I followed the steps the first time, then the next time there was an "incident" I simply said "No hitting" and the behavior stopped. I didn't have to go any further.
Another idea would be to combine your words with actions the first time. (This sounds like what you're doing, only you didn't say what your time-out is). I would use their crib or a playpen, and be sure they are separated from you and from each other in a different room. I would say "no biting" and swoop up the offending party and take him/her to a crib or playpen in another room for 2 minutes. With the supernanny "method" she says to use the firm "no-nonsense" voice (without sounding angry). With this way, you might even say it in a sing-song voice in the "love & logic" style like "Uh oh! No biting please. Looks like a little room time." The idea is that "uh oh!" means swift, immediate action and removal from the environment. Also, the idea of staying calm and NOT sounding angry is important. At least with my daughter, the minute I have a hint of anger in my voice, it's like she gears up for battle and thinks "Ok mom, let's get ready to rumble." If I'm not bothered (or at least I don't SOUND bothered) she's got nothing to counter with.
With all the swooping up and taking toddlers to their crib/playpen, just be sure you lift with your knees and not hurt your back! You'll do it a hundred times over a few days, but it should sink in soon :-)