Rick Price (67), Andre Stolz (68) and Sonny Skinner (70) share fourth place at 6-under-par 138.
Palmer, who played collegiately at Texas A&M, opened on the back nine Friday and tallied three birdies for a 33 on his first nine. He did most of his damage on the second nine, including back-to-back birdies at two and three.
The 26-year-old birdied his final four holes on Friday to vault into first place and take his four-shot lead.
Palmer's second-round 63 bested the previous course record from last year by three strokes. His two-day total of 132 was three shots better than the former 36-hole record set in 2002 by Hank Kuehne and Bryce Molder.
'Today, I hit the ball well and made more putts than I've had in a while. It was a pretty fun day,' said Palmer, who made his Nationwide Tour debut last week at the Jacob's Creek Open Championship. 'I made a couple of long putts which I think you need to when you shoot a number like that.'
Palmer has some experience in getting to the winner's circle. He captured three titles on the American Tight Lies tour in 2002.
'I won three times last year so I've been in a position of winning and I know what it's like so it's going to be a lot of help going into this weekend,' said Palmer. 'Hopefully I can hold on and have a good weekend. I'm looking forward to it.'
O'Malley was flawless on Friday with eight birdies and no bogeys. He fired an 8-under 64 and has a reasonable chance at defending his crown.
Gove eagled the par-5 second hole but mixed five birdies and three bogeys the rest of the way for a 4-under 68.
D.A. Points and Brian Wilson are tied for seventh at 5-under-par 139. Points shot a 68 on Friday while Wilson posted a 69.
Joe Ogilvie, last week's Jacob's Creek Open Champion, Craig Carmichael and Jeff Freeman, the co-leaders after Thursday's first round, stumbled with rounds of 1-over 73 and are part of a large group at 4-under-par 140.
The 36-hole cut fell at even-par 144 and among the golfers who will not play on the weekend are Molder, Greg Turner, Edward Fryatt, Chip Beck and Tommy Tolles.