A system and method for aligning a patient's leg, for establishing the ultimate alignment of the leg prior to making a horizontal femoral cut or a horizontal tibial cut, for preparing the distal femur for receiving a femoral implant, and for making the horizontal, femoral and tibial cuts. The system and method incorporate a spacer, a cutting guide, and a template. The spacer is insertable between a distal femur and a proximal tibia to rotate the tibia with respect to the femur into the desired alignment. The cutting guide is engageable with the spacer, and can be fixed to the proximal tibia and the distal femur. The cutting guide has openings sized and shaped to guide a surgical saw to make the horizontal femoral cut and the horizontal tibial cut. The template is shaped to closely conform with the distal femur to allow the leg to be extended and to allow the procedure to be performed without dislocating a patella. Through one method of the present invention, the practitioner can select the desired ultimate alignment of the leg prior to making the horizontal, tibial and femoral cuts. As a result, when a replacement knee is implanted, the leg will be in the desired alignment.