The 16-year-old, who cannot be identified for legal reasons, was arrested along with a friend, also 16, in a dramatic operation in Bankstown on Wednesday afternoon.

The pair were seen buying knives at a Bankstown gun store that morning and arrested hours later as they entered a prayer hall on Adnum Lane.

The boys did not appear in Parramatta Children's Court on Thursday and did not apply for bail.

Police documents tendered in court allege that one of the boys, a former East Hills Boys High student and stepson of a convicted terrorist, was intercepted making a chilling phone call to his mother in October 2015 with threats against the police.

The phone call came the day after schoolboy killer Farhad Jabar had shot police accountant Curtis Cheng.

He allegedly told his mother over the phone: "When they come, I am going to do something to them that they have never seen before. I am going to do something bigger."

Police will allege this comment was in reference to police potentially raiding his home and "an attempt to draw a direct comparison between himself and the shooting murder of police employee Curtis Cheng".

The boy is also believed to have attended the Hyde Park riots in September 2012 and held a sign that read: "Behead those who insult the prophet."

He was 12 at the time and was with his stepfather, police said.

The second boy arrested on Wednesday travelled to Syria and Iraq recently and was stopped by authorities while attempting to join a terrorist group, police allege.

When he returned to Australia, he was allegedly found in possession of electronic literature purported to have been produced by Islamic State.

The pair have been on counter-terrorism radars for a long time and were under surveillance when they bought the eight-inch M9 bayonets on Wednesday.

Their rapid arrest was testament to "the absolutely amazing work of the Joint Counter-Terrorism Team," NSW Deputy Police Commissioner Catherine Burn said.

"This is extremely serious and the age of these two individuals ... is of unbelievable concern to us," she said.

It's understood the boys had handwritten notes on them with just a few words, some in Arabic, that police sources say comprised a declaration to Islamic State.

They were questioned at Bankstown police station late into the night on Wednesday and charged on Thursday morning with acts done in preparation of a terrorist attack and membership of a terrorist group, namely Islamic State.

Ms Burn said there was no information to suggest they were about to behead an innocent person nor to attack a police station, as has been reported. However, police feared an attack was imminent.

Deputy Commissioner Mike Phelan said it was a mixture of intelligence and police work that tipped them off to the purchase of the knives.

"Potentially someone today would be without their life," he said.

The former East Hills Boys High School student had previously made his dislike of counter-terrorism police well known.

His family's home was raided in the initial Operation Appleby operations in September 2014 and he told Fairfax Media that he was "burning" and would "never forget" the image of his mother being handcuffed at 4.30am without her niqab on.

He claimed neighbours had ostracised him after the raid and he was scared that "someone will attack us or someone will harm us because of what has happened".

The family lost a defamation case against the police but are still pursuing a civil case for wrongful arrest.

The boy was one of two East Hills Boys High students spoken to by police in 2014 after refusing to stand for the national anthem.

Mr Phelan said the arrests once again highlighted the disturbing and rapid radicalisation of young Australians.

"As we've seen before, over the last two years in particular, some of these disrupted plots have happened very quickly. They've gone from zero to full radicalisation within 48 hours or 72 hours to an event that we've had to stop. I can't see that changing in the near future."

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