Thermal annealing of Ag-Cu bi-layer thin films on silica-glass substrates either in air or in oxygen environment has led to the formation of novel composite materials (Ag nanoparticles in compound metal oxide semiconductors). Optical absorption and electron microscopy results have confirmed the presence of Ag nanoparticles in oxide semiconductor materials upon annealing. Drastic reductions of the optical absorption intensity in samples annealed at higher temperatures in different atmospheres are explained as a result of thermal growth of the compound metal oxide semiconductor phases. In particular, X-ray diffraction and photoelectron spectroscopy measurements reveal the phases of mixed oxides in the annealed samples. Various experimental measurements discussed here corroborate well with the observed optical results.