The teenagers were arrested on Saturday morning during coordinated raids at their family homes two miles apart in Northallerton and were taken to a police station in West Yorkshire for questioning.
One of the boys is believed to live with his father and younger brother at home off an affluent tree-lined street.
A neighbour said: "There were about 10 police cars, including unmarked cars here on Saturday from 8am until after midnight, it was a very big operation and they appeared to be searching the house, the garage the garden and car.
"There have been some problems with the kids yelling abuse and causing problems and noise in the street, there has been some abusive language."
The second arrest took place at a property in a village on the outskirts of Northallerton, where a neighbour said: "There were four police cars and a van parked here all weekend, they seemed to be searching a house. The family have a son who is around 14.
"It was a big police operation and it went on for quite a while so we knew it had to be something serious but this is the last place you'd expect anything to do with terrorism."
Officers from Counter Terrorism Policing North East have now been granted a warrant of further detention for the two boys, meaning they will now be held until November 2.
Police confirmed the pair are being held on “suspicion of preparing for an act of terrorism” under Section 5 of the Terrorism Act 2006.
Sources said counter-terror specialists were treating the plot seriously, but it was not clear how established the alleged plans were.
Since the arrests, officers have raided several properties with searches ongoing across North Yorkshire last night - although police have not specified the locations.
A disused garage building, where locals claimed youngsters had been congregating, was the subject of one of the dramatic raids.
One resident said: "There had been a little bit of trouble, some drugs paraphernalia was found, but nothing on the scale of what has been happening this weekend.
"We knew it had to be something significant because of the scale of the police operation.
"They were searching the building and the area around it but we weren't told what for."
And the search has also centred on a large building with a blue metal shutter door in the Romanby area of the town.
Police later confirmed the searches have now been concluded but officers have not revealed whether anything of interest was discovered.
A North Yorkshire police spokesman said the force was supporting the north-east counter-terrorism unit with investigations and searches.
Witnesses reported seeing a large number of police vehicles on Grange Close and Boroughbridge Road, in Romanby, near a derelict former tyre garage, across the weekend.
Numerous police cars were also seen on the A167, the main road to the southern end of Northallerton.
A West Yorkshire Police spokesman said: “We understand people may have concerns as a result of this activity and we are grateful for the patience and understanding of the public while these enquiries are carried out."
Residents expressed their shock that a sweeping terrorism operation had been launched in such an unlikely setting.
A Grange Close resident said: “The officers would only say that it's an ongoing investigation, but if it's connected to an investigation into terrorism then I'm shocked, really shocked.
“A few months back there was a problem with kids getting in there to use it as a skatepark, but the owners put some better security in and it's been fine since. I've never seen anything suspicious at all."
While some assumed the usual police activity was a drill, another resident said: "This is such a quiet street, I really can't believe it.
"We didn't think it was anything to worry about, but now I'm really concerned."
Assistant Chief Constable Phil Cain, of North Yorkshire Police, said: “North Yorkshire police are supporting officers from counter-terrorism policing north-east with their investigation and searches.
“Officers believe that this is an isolated incident and the wider community are not at risk.
“We appreciate the cooperation of local residents whilst the investigation continues.”
The boys will remain in West Yorkshire for questioning until Wednesday.
It is believed a school in the picturesque North Yorkshire town was the target of the alleged plot, and police were called to action after a tip-off from schoolyard pals.
A spokesman for North Yorkshire County Council said: "Northallerton School is supporting the police in their investigation. Police continue to investigate with an open mind to establish what, if any, offences have been committed.
"The school understands that parents and carers may have concerns as a result of these arrests. We would like to reassure them that the safety of the school is paramount and we are working with the police to support our students and prioritise their safety at all times."
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