Auditor General Shauket Fakie said 30 full-time officers were probing allegations of conflict of interest, bribery and process violations in the purchase of helicopters, fighters, submarines and ships.
Public prosecutors are looking into the award of a $5.35bn arms contract to companies in Britain, Germany, Italy, Sweden and France, as well as South Africa itself.
Officials said they are investigating at least 24 individuals and 68 statutory bodies.
The director of public prosecutions, Bulelani Ngcuka, said that criminal prosecutions could take place.
"This may well end up in court," he said.
Critical link
The investigation is the biggest into corruption allegations in the post-apartheid period.
Bank account and other records have been seized and are being examined.
Auditor General Shauket Fakie said 30 full-time officers were probing allegations of conflict of interest, bribery and process violations in the purchase of helicopters, fighters, submarines and ships.
Mr Fakie said a critical issue was to establish a link between gifts received and the allocation of contracts.
The BBC's southern Africa correspondent Alan Little says the highest profile allegation to have been made public concerns the acquisition of a luxury car by the parliamentary head of the ruling African National Congress, Tony Yengeni.
Scandal
Mr Ngcuka confirmed that this was part of the investigation. Public prosecutors hope to publish a substantive report by the end of July.
Our correspondent says it is a scandal that overshadows all South African public life and threatens to engulf senior members of President Thabo Mbeki's government.
Under the 1999 deal, military equipment including submarines, helicopters and jet aircraft were purchased from a range of European manufacturers.
Some of the manufacturing was subcontracted to the South African defence industry.
Opposition politicians and the media have exposed links between the subcontractors and members of the South African Government and military.
The governing African National Congress insisted it was the European arms manufacturers and not the South African Government, which chose the subcontractors.