In case anyone is puzzled, stream_set_timeout DOES NOT work for sockets created with socket_create or socket_accept. Use socket_set_option instead.

Instead of:
<?php
stream_set_timeout($socket,$sec,$usec);
?>

Use:
<?php
socket_set_option($socket, SOL_SOCKET, SO_RCVTIMEO, array('sec'=>$sec, 'usec'=>$usec));
socket_set_option($socket, SOL_SOCKET, SO_SNDTIMEO, array('sec'=>$sec, 'usec'=>$usec));
?>

Another note alread states that blocking-reads may be an issue, if the counterpart responds very slowly - or not at all. The stream timeout may not work as expected in such a situation.

However, php.net provides very little information on how to use non-blocking reading operations. Here's a code sample:

<?php
        stream_set_timeout($c, $timeout);
        $data = '';
        while (is_resource($c) && !feof($c)) {
            // Use non-blocking reading for first loop
            if (($data === '') and ($timeout > 0)) {
                stream_set_blocking($c, false);
                $endtimeOut = time() + $timeout;
                $str = '';
                while ((time() < $endtimeOut) and (strlen($str) < 515) and !feof($c)) {
                    sleep(1);  // Note: This may require tuning
                    $str.= fgets($c, 515);
                }
                // Handling first-read timeout
                if (time() >= $endtimeOut) {
                    trigger_error('Timeout', E_USER_WARNING);
                    break;
                }
                stream_set_blocking($c, true);
            } else {
                $str = fgets($c, 515);
            }
            $data.= $str;

            // Handling of "traditional" timeout
            $info = stream_get_meta_data($c);
            if ($info['timed_out']) {
                    trigger_error('Timeout', E_USER_WARNING);
                    break;
            }
        }
?>

This function seems to have no effect when running as a CLI script, see http://bugs.php.net/bug.php?id=36030

I have found it required to add 

"stream_set_blocking($fp, FALSE )" 

prior to any fgets(), fread(), etc. to prevent the code from hanging up when remote files are called and the response is slow.