Hi,
We've seen an error which is similar. We're also getting the Timeout error and it's not because Sharepoint is actually timing out. In our situation Sharepoint may take a long time to create the workspace if there is a conflict or major load on any of the tables it's writing the data to. This then slows down the creation of the workspace.... but it does eventually complete.
This suggests to me that the K2SPSList.CreateWorkspace method has it's own timeout period independent of the actual Sharepoint process. What I don't know is whether that timeout period can be adjusted in the K2SPSList class/object.
The other angle of attack is to work out why the Sharepoint process is taking longer than normal.
Hope this helps a bit.
DBK