O'Malley, the 2002 champion, struggled to a 1-over 73 and shares third place with Kevin Johnson (66) and Steve Collins (68). The trio finished three rounds at 7-under-par 209.
Stolz was four ahead at the start of Saturday's third round after a course-record, 9-under 63 on Friday. He opened his round with a pair of birdies at three and six to maintain a comfortable advantage.
On the second nine things got closer for Palmer, who is making only his second start on the Nationwide Tour. He birdied No. 12 but dropped shots at the par-4 13th and the par-4 closing hole.
Tightening the gap was Stolz, who was 2-under on his round until he reached the 205-yard 16th. He landed a 5-iron 30 feet short of the hole but watched as the ball rolled into the bottom of the cup for the ace.
'I hit it exactly where I wanted to,' said Stolz. 'It pitched perfectly off the ridge.'
Despite his lead dropping to three shots, Palmer, who won three times last year on the American Tight Lies tour, has a strategy for Sunday's final round.
'I've got to go out as if I'm two or three behind. I've got to stay aggressive,' said Palmer, a Texas A&M product. 'I don't want to get too protective. That's when you can get into trouble.'
Nick O'Hern is alone in sixth place at 6-under par, followed by Andrew Bonhomme (67), Chris Downes (68), David Branshaw (69), Joe Ogilvie (71), David Morland IV (71), Jeff Freeman (71) and Rick Price (73). That group is tied for seventh at minus-5.