Fifty-three-year-old Jay Overton carded a 4-under-par 68 to take third place, while Allen Doyle, Doug Tewell and Jim Thorpe are one stroke further back at minus-3 on the Jones Course at Rock Barn Golf Club and Spa.
Lye, who hasn't won since the 1983 Bank of Boston Classic on the PGA Tour, got off to a flying start. He rolled in a 10-foot birdie at the second to get into red figures.
The 51-year-old Lye picked up his second birdie at the par-5 fourth. He came right back to birdie the next from 20 feet out to get to 3 under. Lye made it three straight when he rolled in a 10-foot birdie try at the sixth.
Lye, who has never finished higher than fifth after any one round in his Champions Tour career, kept his hot play going as he dropped in another 10-foot birdie putt at the par-4 eighth.
He then ran off five consecutive pars around the turn to remain atop the leaderboard. Lye picked up birdie No. 6 at the par-5 14th after dropping a wedge within 2 feet of the cup. He closed with four straight pars to cap a bogey-free round that matched his career low score on the Champions Tour.
'I haven't played a whole lot,' said Lye, whose best finish this year was a tie for 16th at the Blue Angels Classic. 'I had surgery after the Senior PGA. My first week back was in Minnesota. I played very well for 15 holes. Some of the best golf I've ever played.'
Wadkins opened with five straight pars before dropping in back-to-back birdies from the sixth. He picked up his third birdie around the turn at the 10th from 3 feet out.
He came back with a 14-foot birdie at the 12th and collected his fifth birdie at the par-5 14th. Wadkins, the 2001 Long Island Classic winner, parred in to cap a round of 5-under-par 67.
'I played good and snuck in five birdies,' Wadkins said. 'I only had one chance for bogey at No. 9 and I got it up-and-down for par.'
Jay Sigel and Bruce Fleisher are four strokes back at minus-2 along with Larry Nelson, Jack Spradlin and Doug Johnson.
Craig Stadler, the defending champion, opened with a 1-under-par 71 and stands in a tie for 12th.
Eduardo Romero, who is making his Champions Tour debut in the United States, opened with an even-par round of 72.