Solution
The timeout error happened when the format of PharLap Real Time File System is set to FAT File System.
This problem can be solved by changing the format to Reliance File System.
As shown in Figure 1 and Figure 2 below, on FAT File System when the number of folders exceed 700 there is sudden drop on the loop rate.
But on the Reliance File System the loop rate is faster and more stable when the number of folders increased.
Figure 1: FAT File System
Figure 2: Reliance File System