Hale Irwin, Andy Bean, Allen Doyle and Austin resident Tom Kite share third place at 3-under-par 69. Graham Marsh and Jose Maria Canizares are tied for eighth at minus-2.
Inman broke into red figures with a five-foot birdie putt at the second hole, then found a bunker off the tee at the par-3 third. He blasted out to 12 feet and holed the clutch par save to keep the round alive.
'I made a great par at No. 3,' said Inman, a three time winner on the Champions Tour who has not visited the winner's circle since the 2000 SBC Senior Classic. 'That kept things going and I went on to birdie three straight.'
Inman rattled off three birdies in a row from the fourth, including a chip-in birdie from 35 feet at the sixth. He parred out on the front side to make the turn at 4-under 32.
Inman holed a 12-foot birdie putt at the 537-yard, par-5 10th. He made another clutch par save at 12, this time from 14 feet but his luck finally ran out when he found a bunker at 13 and took bogey.
Inman rebounded from the mishap at 13. He sank a three-foot birdie putt at 15 then drained a 30-footer for birdie at the 16th after he knocked a 5-iron onto the green at the par-3 hole. He reached the green in two at the last and two-putted for birdie and his lowest round since a 65 in the opening round of the 2001 Lightpath Long Island Classic.
'I have played so poorly the last year and a half,' said Inman, who has recorded only one top-10 since the start of the 2002 campaign. 'It was a combination of things. I changed drivers and it screwed up my swing and I changed back to a shorter driver and I feel more comfortable now.'
Watson had quite a round on Friday. He opened with a bogey at two, then picked up two birdies at five and six before holing out for eagle with a 9-iron at six. Watson closed his front nine with a bogey at seven and a pair of birdies at eight and nine to complete a bizarre, 4-under 32 on the front side.
Watson traded three birdies and three bogeys on the back nine to fall to 4-under par. At the par-5 18th, Watson had only a 9-iron to reach the green in two and he landed the ball 25 feet from the hole, where he sank the eagle putt to get within one of Inman's lead.
'This round of golf was not a normal round of golf,' said Watson. 'It had a lot of drama to it. It was very exciting. I didn't play particularly well but I made the most out of it.'
Jack Nicklaus, the course designer, shot a 1-under-par 71 and is tied for 10th with Jim Ahern, Bob Gilder and Dave Stockton.
This is the first time that the Austin area has hosted a Champions Tour event since the Liberty Mutual Legends of Golf moved after the 1994 season. The Hills Country Club is no stranger to professional golf, as it hosted the Nationwide Tour's previously named Nike Greater Austin Open from 1997-98.