Arroyo, 32, is due nearly $4 million for the rest of this season, plus $11 million in 2010 and a $2 million buyout or a $11 million option in 2012. Arroyo is 10-9 with a 5.21 ERA, but he has a 2.08 ERA in his past three starts.
Reds top officials met via conference call this morning, an indication to one big-league source that they were "close to a deal." Arroyo remains the scheduled starter for Tuesday night's game against the Padres, according to Cincinnati's official Twitter account, however the Yankees have two scouts in Cincinnati.
The Yankees had a scout in Seattle specifically to see Lee pitch on Sunday against the Mariners, a source said.
Lee is the next-best alternative to Halladay, but he'll also come at a steep price. The Indians have him signed for next year, when they have reasonable hope of contending again.