Counterterrorism police have alleged two of the five men they arrested in an operation in Melbourne on Saturday morning were planning an Islamic State-inspired terrorist attack on an Anzac Day ceremony.

Sevdet Besim, 18, of Hallam, has been charged with conspiring to commit a terrorist act and appeared in the Melbourne Magistrates Court.

He did not apply for bail and was remanded in custody until next Friday.

However the defence told the court Besim would apply for bail at a later date.

A second man, 18, from Hampton Park, was also arrested on terrorism-related offences this morning during a major joint counterterrorism team operation.

A third man was arrested for weapons offences and two other men were in custody assisting police with their enquiries, after seven search warrants were executed.

Three of the five men arrested were injured in the operation.

One suffered a head wound and another resisted arrest.

Capsicum spray was used to subdue the men.

The Australian Federal Police said they believed the two 18-year-olds were plotting an attack to take place on Anzac Day.

Victoria Police Deputy Commissioner Shane Patton said it was believed the attacks were to have involved the use of "edged knives".

Police outside a house in Hallam that was raided in the joint counterterrorism operation. ( ABC News )

"It is alleged both men were undertaking preparations for a terrorist attack at an Anzac Day activity in Melbourne which included targeting police officers," he said.

AFP Acting Deputy Commissioner Neil Gaughan described the plot as being inspired by Islamic State (IS).

"At this stage we have no information that it was a planned beheading. But there was reference to an attack on police," he told a news conference in Melbourne.

"Some evidence that was collected at a couple of the scenes and some other information we have leads us to believe that this particular matter was ISIS-inspired."

This morning's operation involved 200 police officers and was the culmination of Operation Rising.

The ABC understands that a number of the arrested men attended the Al Furqan Islamic study centre in South Springvale and were associates of Abdul Numan Haider, who also attended the centre.

Haider was shot and killed by counterterrorism police in September last year.

AFP Acting Deputy Commissioner Neil Gaughan said members of the community should not feel anxious.

"At this stage we're comfortable that we have this threat fully contained," he said.

"[Members of the public] should feel reassurance as a result of the operations."

Resident said raid was a 'shock'

The front window of a house on George Cudleigh Drive in Hallam appeared to be broken after the raid. ( ABC News: Justine Longmore )

Searches are continuing at several addresses in the south-eastern metropolitan area and investigations are ongoing.

David Johnston lives near one of the houses raided in Hallam and said he was on good terms with the residents.

"It just frightens you because you don't know what's happening," he said.

"It's just a shock. You wouldn't think it would happen in your street."

Federal Government Minister Mathias Cormann told Sky it was a concerning development.

"It's obviously a matter of concern that we face this kind of threat in our community," he said.

"It's good to know that our counterterrorism agencies are working to keep us safe."

Australians urged to attend Anzac Day ceremonies

Prime Minister Tony Abbott is urging Australians not to allow the terror threats to deter them from attending Anzac Day commemorations.

He said Australians should attend next weekend's ceremonies in the "largest possible numbers".

"The best thing you can do in the face of those who would do us harm is live your life normally," he said.

"The best sign of defiance we can give to those who would do us harm is to go about a normal, peaceful free and fair Australian life."

AFP Deputy Commissioner Michael Phelan said police were able to act more quickly because of recent laws giving them more power.

"We are extremely confident that this particular cell [that] we've now wrapped a plan around them and we believe we've stopped these particular plots," he said.

Opposition leader Bill Shorten said Labor supported the country's national security agencies and when it came to keeping people safe "we are all in this together".

Terror plot 'evil', security increased for Anzac Day events: Premier

Victorian Premier Daniel Andrews said the alleged terrorist plot was "simply evil, plain and simple".

Mr Andrews said Victorians should not be afraid about attending Anzac Day activities. ( ABC News )

He said Victorians needed to take the threats seriously but never be "defined by them".

"These people arrested today are not people of faith, they don't represent any culture," he said.

"This is not an issue of how you pray or where you were born. This is not about those issues.

"Together with Victoria Police, Commonwealth law enforcement and intelligence agencies, the Victorian Government continues to take reasonable and necessary steps to keep every Victorian safe."

Victoria Police Acting Chief Commissioner Tim Cartwright assured the community that the force would take "additional steps" to keep the community safe on Anzac Day.

"There will be a greatly increased visible police presence," he said.

"There is a significant increase in police numbers over the major events that are coming up over this week, particularly over the Anzac Day weekend.

"We are not restricting our planning and thoughts to Melbourne. We are looking at Anzac Day events around Victoria, strengthening our events there."

The national terrorism alert level remains high and anyone who sees suspicious activities is advised to call the national security hotline on 1800 123 400.