First-round leader Scott Simpson posted a 1-under 71 and stands at minus-6. He was joined in second place by Massy Kuramoto (65), Gil Morgan (70), Tom Purtzer (67) and Danny Edwards (65).
Defending Senior PGA Champion Mike Reid is alone in seventh place at 5-under-par 139 after a 3-under 69 in round two on the Nicklaus Course at Vista Vallarta Golf Club.
Hatalsky, a two-time winner on the Champions Tour, birdied five of his final nine holes on Friday to shoot 70. He started his second round equally as hot.
The 54-year-old birdied the second and came right back with a birdie on the third to get to minus-four. Hatalsky picked up his third birdie on the par-3 fifth.
Hatalsky started another birdie run at the seventh. He birdied the par-5 eighth to climb to 7 under and then made it three straight as he birdied the ninth to turn at minus-8.
The California native parred the first three holes on the back nine. Hatalsky then drained a birdie putt on the par-4 13th. However, he stumbled to a double bogey on the par-3 15th to slip to 7 under.
'It was a tremendous round of golf for me,' said Hatalsky, who leads entering the final round for the first time in his career. 'I felt good about my game today. I made a mental error on 15 with the wind in my face, then it switched to a crosswind. I wasn't committed to the shot and it went into the water.'
Simpson extended his overnight lead with birdies on the second and fifth to move to 7 under. Unfortunately, he faltered to a double bogey on the seventh.
The 1987 U.S. Open champion got those strokes back with an eagle on the par- 5 10th. Simpson got to 8 under with a birdie on the 11th, but struggled down the stretch with bogeys on the 14th and 17th to end one back.
Morgan bogeyed the fourth, but ran off three birdies in a four-hole stretch from the eighth to get to minus-6. He dropped a stroke to par on 17, but came right back to a birdie the last.
Kuramoto, the medalist at the 2005 Champions Tour Qualifying School, wrapped birdies at one and three around a bogey on the second.
He ran off five consecutive birdies from the seventh to fly up the leaderboard and get to 5 under. Kuramoto collected his final birdie the 14th before four straight pars to close out his round.
Purtzer had one birdie and one bogey over his first four holes. He played the seventh through 12th holes at 5 under with an eagle and three birdies to get to 6 under. Purtzer slipped to a bogey on 14, but got that stroke back with a birdie at 16.
Edwards carded seven birdies over his first 13 holes to get to six-under par. He bogeyed the 14th, but came right back with a birdie at the next. Edwards again traded a bogey for a birdie from the 17th to end one back.
Eduardo Romero posted a 3-under 69 to get 4-under-par 140. He shared eighth place with Allen Doyle, David Eger, Hale Irwin, Mark Johnson and Dan Pohl. Four more players are one stroke further back at minus-3.