Ugh, I think we live in the same house!! ;) My son is exactly the same, he is 2 and my daughter is 4. We've been dealing with his random hitting issue for a while actually, and it's not just limited to his sister, which majorly stresses me out! Anyway, I know it seems like time out isn't working but I honestly think it seems to be the road to take. I think that at this age they just need consistency, consistency, consistency! My son will now sometimes put himself in time out after he hits someone and I crack up about it, but at least he's making the connection. He only recently started showing any sort of discomfort or dislike by being placed in time out and that isn't even all the time, he still seems to laugh a lot. BUT, and here's the good news...his hitting has actually decreased in the past few weeks. Now, admittedly, I have no idea if it's because I consistently put him time out time after time or he's just growing out if and finally starting to "get it", but either way I'm starting to breathe a little easier. I also agree with you that spanking is totally a double standard and it doesn't matter if how aware or not aware your 2 y/o is...if you hit him b/c he hit someone else, that just doesn't make any sense.
Anyway, my advice is to hang in there and just be conistent time after time. At least you'll feel like you're doing something, right! ;) I know this porbably isn't the advice you were looking for, but I haven't found anything that actually works! Maybe I'm missing the boat too! Haha!!
As far as your daughter it's hard there too b/c the girls are tired of being hit, and rightfully so, but I still send the message that violence is not tolerated and she shouldn't hit back but yet become vigilant in her voice. I teach her to say things like No stop, that hurts, leave me alone, etc.