The world No.4 and pre-tournament favourite posted a three-under-par 70 at Kingston Heath to finish the morning just two shots behind the clubhouse leaders.
At five under, Lee was sharing fourth spot with fellow West Australian major winner Hannah Green after collecting five birdies and only two bogeys on Friday.
"I hit it good all day, was just was a bit shaky with the putter on the second nine," Lee said.
"I had a pretty fast start, played pretty solid so hopefully I can play better at Vic on the weekend."
Playing with Lee, LPGA Tour rival and compatriot Steph Kyriacou also carded a 70 to climb to four under to be three shots behind first-round leader Grace Kim.
Korea's two-time major winner So Yeon Ryu and South Africa's reigning British Open champion Ashleigh Buhai joined Kim atop the leaderboard at seven under with a pair of 68s at Kingston Heath on Friday.
Kim had an afternoon tee time at Victoria GC, the co-host of the historic first dual-gender Australian Open.
The 21-year-old was continuing her audacious bid to win her maiden Open as a professional after snaring the first-round lead in stunning fashion.
The Sydney sensation birdied her first five holes en route to a seven-under 66.
Green was also hitting off in the afternoon wave.
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