Police, acting on a public tip-off, raided a fitness center in northern Penang island Sunday while a sex party was in progress and arrested the 37 men, aged between 20 and 45, said local police chief Azam Abdul Hamid.
Apart from the two foreigners, all of the men are ethnic Chinese Malaysians including three who work at the center, he said.
Police found used condoms strewn all over the floor, seven tubes of lubrication jelly, 20 gay magazines, four pornographic VCDs and six boxes of new condoms, he said.
"Based on our information, the center was regularly used for these gay activities," Azam told The Associated Press. "This is against our culture, our way of life."
Investigations are ongoing but he said the operator of the premises could lose his business license if he is found to have abused it, and the men, who have been released, could be charged with committing unnatural sex acts.
Homosexuality is not specified as a crime in predominantly Muslim Malaysia but it is covered under a law prohibiting sodomy, which is punishable by up to 20 years in prison and whipping.
Azam said police are also surveilling other centers suspected to be involved in gay activities under an ongoing operation to check vice activities in Penang island, a major tourist and technology hub.