Dunlap completed 36 holes at 7-under-par 133. He collected his lone tour win at the 2004 Mark Christopher Charity Classic.
Arjun Atwal carded a 4-under 66 in the second round to move into second place at minus-4.
First-round leader Jeff Klauk struggled to a 3-over 73 Friday. That dropped him into a share of third place at 3-under-par 137. He stands alongside Chris Smith (70) and Ben Bates (71).
Dunlap opened on the 10th tee Friday and proceeded to bogey that hole. He came back with birdies on 11 and 12 to move to 6-under.
However, Dunlap dropped another shot on the par-3 13th at Panama Golf Club. He recovered that lost stroke with a birdie on the 15th.
Dunlap parred three straight before dropping in a birdie putt on the par-4 first that moved him to minus-7. He closed his round with eight straight pars to lead by three.
'You really have to think your way around,' Dunlap said. 'You don't fire at the pins. I hit a lot of good-looking iron shots to give myself chances. At 7-under, that is the best I've played in a long time.
'I've exceeded my expectations. But to be perfectly honest, the first tournament of the year, you don't even know what your expectations are.'
Atwal also played the back nine first on Friday. He poured in back-to-back birdies from the 11th to move to 2-under. After a birdie on the 15th, Atwal gave a stroke back with a bogey on 16.
He parred three in row around the turn before dropping in a birdie effort on No. 2.
Atwal birdied the par-5 fourth and made it two in a row as he also birdied the fifth. He parred the next three before faltering to a bogey on the ninth to end three back.
Bill Lunde is alone in sixth place at 2-under-par 138 after a second-round 70. Joe Daley (69), Brendon De Jonge (73) and Jarrod Lyle (65) are one shot further back at minus-1.
Seven players -- including Matthew Every and Phil Tataurangi -- are tied for 10th at even-par 140.
The cut line fell at 5-over-par 145 with 62 players moving on to the weekend. Among those missing the cut were Jay Delsing (146), 2007 champion Miguel Carballo (147), Gavin Coles (148) and Franklin Langham (148).