T.D.
I think that you should continue with the time outs but make sure that he understands why is was put in time out. Maybe try putting a band-aid on sister to let him know that he hurt her. If there is a situation with a toy involved, take the toys away and do not give them back until he says he is sorry. It could also be a jealousy thing-make sure that you spend some "Mommy and Son time" so that he feels like he is getting enough attention. Hitting is a phase, my 18 month old is going through it right now as well. She does understand no, but it is also very challenging. Whatever method you attempt, be consistent. I found that this definitely makes a difference.
Good luck