It is well-known that every first-order property on words is expressible using at most three variables. The subclass of properties expressible with only two variables is also quite interesting and well-studied. We prove precise structure theorems that characterize the exact expressive power of first-order logic with two variables on words. Our results apply to both the case with and without a successor relation. For both languages, our structure theorems show exactly what is expressible using a given quantifier depth, n, and using m blocks of alternating quantifiers, for any m=n. Using these characterizations, we prove, among other results, that there is a strict hierarchy of alternating quantifiers for both languages. The question whether there was such a hierarchy had been completely open. As another consequence of our structural results, we show that satisfiability for first-order logic with two variables without successor, which is NEXP-complete in general, becomes NP-complete once we only consider alphabets of a bounded size.