We bend the knees during the words "ואנחנו כורעים" and bow during the word "ומשתחוים" (Shulchan Shlomo: Siman 132, Sif 2 - as cited in sefer "Ishei Yisrael").
Furthermore, it is important to note that the Rema (in Siman 132, Sif 2) teaches that after reciting the phrase "שהם משתחוים להבל וריק ומתפללים אל אל לא יושיע" (which notes how others pray to their powerless deity/deities), one should pause prior to reciting "ואנחנו כורעים" (where the pause clearly denotes a distinction between those who worship HaShem referred to in "ואנחנו כורעים" to those who engage in avodah zarah).