Bay Networks Inc. shares rose more than 10% despite a warning by the company that its fiscal third-quarter earnings will lag expectations because of price cuts and slowing sales of a key networking product. Shares in the No. 3 networking equipment maker surged $2.50 to close at $26.50 on the New York Stock Exchange. After the company's warning late Tuesday, the shares fell as low as $24 in composite trading, 29% lower than their 1998 high on Feb. 27. In January, Santa Clara-based Bay cut prices on its so-called fast ethernet switch, used to link computers in corporate networks, by more than 50% amid increasing competition from larger rivals Cisco Systems Inc. and 3Com Corp. Bay said revenue in the third quarter will be 10% less than the $645 million it reported for its fiscal second quarter. Gross margins also will narrow, resulting in profit before charges of about 12 cents a share, less than the 28 cents expected by analysts.