The 16-year-old boys were arrested by counter-terrorism police outside a Bankstown prayer hall on Wednesday afternoon after allegedly purchasing the weapons from a nearby gun shop earlier in the day.
Authorities are unaware of any specific target but believe an attack was imminent.
"Had we not been in the right place at the right time ... certainly somebody, potentially today, would be, or another day imminently, would be without their life," AFP Deputy Commissioner Michael Phelan told reporters on Thursday.
The teens have been charged with planning an act of terror - which carries a penalty of life behind bars - and being members of Islamic State, which carries a penalty of 10 years' prison.
The pair were formally refused bail at Parramatta Children's Court on Thursday morning, with their cases adjourned until December 7.
"The events of yesterday are particularly sobering for all of us, particularly given the age of these individuals," Mr Phelan said.
Police believe the boys had been radicalised, but would not say over how long or by whom.
"I think they had potential radicalisation from potentially radicalised peers," NSW Police Deputy Commissioner Cath Burn said.
Ms Burn refused to confirm reports one boy was related to a man already in jail convicted of terror offences, but said: "We know that they have connections with people who are radicalised and who are of concern to us."
On speculation the teens were plotting a beheading attack, Ms Burn said: "We don't have any information to indicate that, however it is an ongoing investigation."
She said counter-terror police were "well aware" of the 16-year-olds before the alleged terror plot and held concerns about them, but would not say whether either teen were on terror watch lists.
"This is a culmination of information rather than a specific piece of information," Ms Burn said of their arrests.
"Even though it was very rapid from the time we needed to act, we had been undertaking activities prior."
Four western Sydney properties connected with the teenagers - including a prayer hall and multiple homes - were raided after the boys were taken into custody.
Items were seized for forensic examination and police have not ruled out making further arrests over the thwarted alleged terror plot.
Ms Burn would not comment on reports of a note being found on one of the boys, as the matter is now before the courts.
The age of the two boys is of significant concern to counter-terrorism police, who are seeing an increase in the number of radicalised teens.
"The age of these two individuals at the age of 16 is (of) unbelievable concern to us. We are seeing it time and time again," Ms Burn said.
"It's up to the parents, really, to try to do everything they can to make sure those signs of radicalisation at an early stage are addressed."
This is the 11th imminent terror attack prevented by the Joint Counter Terrorism Teams in Australia, authorities say.
"We've got to remember that our current threat level is probable, and it's there for a reason. There are people, no matter what age unfortunately, who want to do an attack and who can do an attack," Ms Burn said.
"We are doing everything we can to prevent such attacks."
