I'm sorry to hear you're experiencing this issue.
That being said, the WebAii Framework comes with its own runner - ArtOfTest.Runner.exe. I recommend that you use that unless you have specific reasons to go with Gallio. We don't guarantee any degree of integration with Gallio.
You state that you've tried just about everything we recommend for resolving the timeout error. This leads me to believe the problem is somehow related to Gallio and not with WebAii per se.
Please run your tests with ArtOfTest.Runner.exe (you'll find it in the installation dir for WebAii) I want to see whether the problem will still appear.
Also, if possible, please go ahead and send us your test project. Since this this a public forum I'll give you my e-mail to send it to(when you confirm you can send it).
Hope to hear from you soon!
the Telerik team