You might be able to use colordiff for this.
In their man page:
Any options passed to colordiff are
  passed through to diff except for the
  colordiff-specific option 'difftype',
  e.g.
colordiff --difftype=debdiff file1
  file2
Valid values for 'difftype' are: diff,
  diffc, diffu, diffy, wdiff, debdiff;
  these correspond to plain diffs,
  context diffs, unified diffs,
  side-by-side diffs, wdiff output and
  debdiff output respectively. Use these
  overrides when colordiff is not able
  to determine the diff-type
  automatically.
I haven't tested it, but the side-by-side output (as produced by diff -y file1 file2) might give you the equivalent of in-line differences.