Document:

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                                                                     EXHIBIT 4.3

                       CONVERTIBLE SUBORDINATED DEBENTURES

                                       AND

                           WARRANTS PURCHASE AGREEMENT

                                     BETWEEN

                            ACRES GAMING INCORPORATED

                                       AND

                         THE INVESTORS SIGNATORY HERETO

        CONVERTIBLE SUBORDINATED DEBENTURES AND WARRANTS PURCHASE AGREEMENT
dated as of December 21, 2001 (the "Agreement"), between the Investors signatory
hereto (each an "Investor" and together the "Investors"), and Acres Gaming
Incorporated, a corporation organized and existing under the laws of the State
of Nevada (the "Company").

        WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Investors,
and the Investors shall purchase, in the aggregate, (i) $5,000,000 principal
amount of the Convertible Subordinated Debentures, and (ii) the Warrants; and

        WHEREAS, such investments will be made in reliance upon the provisions
of Section 4(2) ("Section 4(2)") and/or 4(6) ("Section 4(6)") of the United
States Securities Act of 1933, as amended (the "Securities Act") and/or
Regulation D ("Regulation D") and the other rules and regulations promulgated
thereunder, and/or upon such other exemption from the registration requirements
of the Securities Act as may be available with respect to any or all of the
investments in securities to be made hereunder.

        NOW, THEREFORE, in consideration of the foregoing premises, and the
promises and covenants herein contained, the receipt and sufficiency of which
are hereby acknowledged by the parties hereto, the parties, intending to be
legally bound, hereby agree as follows:

                                   ARTICLE I

      PURCHASE AND SALE OF CONVERTIBLE SUBORDINATED DEBENTURES AND WARRANTS

Section 1.1. Investment.

        (a) Upon the terms and subject to the conditions set forth herein, the
Company agrees to sell, and the Investors agree to purchase, severally and not
jointly, the Convertible Subordinated Debentures together with the Warrants at
the Purchase Price on the Closing Date. Within five

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(5) Trading Days of the execution and delivery of this Agreement, the Investors
shall purchase, severally and not jointly, in the aggregate, $5,000,000
principal amount of Convertible Subordinated Debentures together with the
Warrants at the Purchase Price. Each Investor shall deliver immediately
available funds in their proportionate amount of the aggregate Purchase Price,
as set forth on the signature pages hereto, and the Company shall deliver the
Convertible Subordinated Debentures evidencing said principal sum and the
Warrants. Upon satisfaction of the conditions set forth in Section 1.1(b), the
Closing shall occur at the offices of Feldman & Associates, Counselors at Law,
P.C., 36 West 44th Street, Suite 1201, New York, New York 10036.

        (b) The Closing is subject to the satisfaction or waiver by the party to
be benefited thereby of the following conditions:

               (i)    acceptance and execution by the Company and by the
                      Investors, of this Agreement;

               (ii)   delivery by each Investor of immediately available funds
                      in their proportionate amount of the Purchase Price as
                      indicated and set forth on the signature pages hereto;

               (iii)  all representations and warranties of the Investors
                      contained herein shall remain true and correct as of the
                      Closing Date;

               (iv)   all representations and warranties of the Company
                      contained herein shall remain true and correct as of the
                      Closing Date;

               (v)    the Company shall have obtained all permits and
                      qualifications required by any state for the offer and
                      sale of the Convertible Subordinated Debentures and the
                      Warrants, or shall have the availability of exemptions
                      therefrom;

               (vi)   the sale and issuance of the Convertible Subordinated
                      Debentures and the Warrants hereunder, and the proposed
                      issuance by the Company to the Investors of Conversion
                      Shares or Warrant Shares upon the conversion or exercise
                      thereof shall be legally permitted by all laws and
                      regulations to which the Investors and the Company are
                      subject and there shall be no ruling, judgment or writ of
                      any court prohibiting the transactions contemplated by
                      this Agreement;

               (vii)  from the date hereof to the Closing Date, trading in the
                      Common Stock shall not have been suspended by the SEC
                      (except for any suspension of trading of limited duration
                      agreed to by the Company, which suspension shall be
                      terminated prior to the Closing), and, at any time prior
                      to such Closing Date, trading in securities generally as
                      reported by Bloomberg Financial Markets shall not have
                      been suspended or limited, or minimum prices shall not
                      have been established on securities whose trades are
                      reported by such service, or on the Principal Market, nor
                      shall a banking moratorium have been declared either by
                      the United States or New York

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                      State authorities, nor shall there occurred any material
                      outbreak or escalation of hostilities or other national or
                      international calamity of such magnitude in its effect on,
                      or any material adverse change in, any financial market
                      which, in each case, in the judgment of the Investors,
                      make it impracticable or inadvisable to purchase the
                      Convertible Subordinated Debentures;

               (viii) delivery of the applicable original fully executed
                      Convertible Subordinated Debentures and Warrants;

               (ix)   delivery of an opinion of Perkins Coie LLP, counsel to the
                      Company, in the form of Exhibit C hereto;

               (x)    delivery of the Irrevocable Instructions to Transfer Agent
                      in the form attached hereto as Exhibit E; and

               (xi)   delivery of the Registration Rights Agreement.

Section 1.2. Warrants. At the Closing, the Company shall issue to each Investor
a Warrant to purchase up to a number of Warrant Shares equal to 15% of the
principal amount of the Convertible Subordinated Debenture purchased by such
Investor divided by the average of the 5 VWAPs occurring immediately prior to
the Closing Date (such average price, the "Warrant Base Price"). The exercise
price of the Warrants shall be equal to 110% of the Warrant Base Price. The
Warrants shall be exercisable for a period of 5 years beginning on their
issuance date. The shares of Common Stock underlying the Warrants shall be
registered for resale on the Registration Statement for resale by the Investors
pursuant to the Registration Rights Agreement.

Section 1.3. Liquidated Damages. The parties hereto acknowledge that with
respect to the delivery of the Conversion Shares, time is of the essence and the
Company shall be liable for the liquidated damages set forth in the Convertible
Subordinated Debentures. Additionally, the parties hereto acknowledge and agree
that the sums payable pursuant to this Agreement, the Registration Rights
Agreement and the Convertible Subordinated Debentures shall constitute
liquidated damages and not penalties. The parties further acknowledge that a
breach by either party of this Agreement or exhibits hereto, (a) the amount of
loss or damages likely to be incurred is incalculable or is difficult to
precisely estimate, (b) the amounts specified in such agreements bear a
reasonable proportion and are not plainly or grossly disproportionate to the
probable loss likely to be incurred by the Investors in connection with the
failure of the Company to timely cause the registration of the Registrable
Securities or to deliver stock certificates upon any conversion, and (c) the
parties are sophisticated businesses and have been represented by sophisticated
and able legal and financial counsel and negotiated this Agreement at arm's
length.

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                                   ARTICLE II

                       REPRESENTATIONS AND WARRANTIES OF EACH INVESTOR

Each Investor, severally and not jointly, represents and warrants to the Company
that:

Section 2.1. Organization. The Investor is duly organized, validly existing and
in good standing under the laws of its jurisdiction of organization.

Section 2.2. Intent. The Investor is entering into this Agreement for its own
account and not with a view to or for sale in connection with any distribution
of the Common Stock. The Investor has no present arrangement (whether or not
legally binding) at any time to sell the Convertible Subordinated Debenture, the
Warrants, the Conversion Shares or the Warrant Shares to or through any person
or entity; provided, however, that by making the representations herein, the
Investor does not agree to hold such securities for any minimum or other
specific term and reserves the right to dispose of the Conversion Shares and
Warrant Shares at any time in accordance with federal and state securities laws
applicable to such disposition, and in accordance with the terms set forth in
the Convertible Subordinated Debenture or Warrant. The Investor has no agreement
with any person to distribute any of the securities subject to this Agreement.

Section 2.3. Sophisticated Investor/Broker-Dealer. The Investor is a
sophisticated investor (as described in Rule 506(b)(2)(ii) of Regulation D) and
an accredited investor (as defined in Rule 501 of Regulation D), and Investor
has such experience in business and financial matters that it has the capacity
to protect its own interests in connection with this transaction and is capable
of evaluating the merits and risks of an investment in the Convertible
Subordinated Debentures, the Warrants and the underlying Common Stock. The
Investor has been represented by counsel of its choice. The Investor
acknowledges that an investment in the Convertible Subordinated Debentures and
the Warrants and the underlying Common Stock is speculative and involves a high
degree of risk. The Investor is not a registered broker-dealer under Section 15
of the Exchange Act.

Section 2.4. Authority. This Agreement and each agreement attached as an exhibit
hereto which is required to be executed by the Investor has been duly authorized
and validly executed and delivered by the Investor and is a valid and binding
agreement of the Investor enforceable against it in accordance with its terms,
subject to applicable bankruptcy, insolvency, or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application.

Section 2.5. Not an Affiliate. The Investor is not an officer, director or
"affiliate" (as that term is defined in Rule 405 of the Securities Act) of the
Company.

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Section 2.6. Absence of Conflicts. The execution and delivery of this Agreement
and each agreement which is attached as an exhibit hereto and executed by the
Investor in connection herewith, and the consummation of the transactions
contemplated hereby and thereby, and compliance with the requirements hereof and
thereof by the Investor, will not violate any law, rule, regulation, order,
writ, judgment, injunction, decree or award binding on the Investor or (a)
violate any provision of any indenture, instrument or agreement to which the
Investor is a party or is subject, or by which the Investor or any of its assets
is bound; (b) conflict with or constitute a material default thereunder; (c)
result in the creation or imposition of any lien pursuant to the terms of any
such indenture, instrument or agreement, or constitute a breach of any fiduciary
duty owed by the Investor to any third party; or (d) require the approval of any
third-party (which has not been obtained) pursuant to any material contract,
agreement, instrument, relationship or legal obligation to which the Investor is
subject or to which any of its assets, operations or management may be subject.

Section 2.7. Disclosure; Access to Information. The Investor has received all
documents, records, books and other publicly available information pertaining to
Investor's investment in the Company that have been requested by the Investor.
The Company is subject to the periodic reporting requirements of the Exchange
Act, and the Investor has reviewed copies of all SEC Documents filed within the
last 12 months or otherwise deemed relevant by Investor. No such review or other
investigation by the Investor shall diminish the Investor's right to rely on the
representations and warranties of the Company or relieve the Company's
objections with respect thereto.

Section 2.8. Manner of Sale. At no time was Investor presented with or solicited
by or through any leaflet, public promotional meeting, television advertisement
or any other form of general solicitation or advertising.

                                  ARTICLE III

                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company represents and warrants to the Investors that, except as set forth
in the SEC Documents or on the Disclosure Schedule prepared by the Company and
attached hereto:

Section 3.1. Organization of the Company. The Company is a corporation duly
incorporated and existing in good standing under the laws of the State of Nevada
and has all requisite corporate authority to own its properties and to carry on
its business as now being conducted. The Company is duly qualified and is in
good standing as a foreign corporation to do business in every jurisdiction in
which the nature of the business conducted or property owned by it makes such
qualification necessary, other than those in which the failure so to qualify
would not have a Material Adverse Effect.

Section 3.2. Authority. (a) The Company has the requisite corporate power and
corporate authority to conduct its business as now conducted, to enter into and
perform its obligations under this Agreement, the Registration Rights Agreement
and the Warrants, and to issue the

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Convertible Subordinated Debentures, the Conversion Shares, the Warrants and the
Warrant Shares pursuant to their respective terms, (b) the execution, issuance
and delivery of this Agreement, the Registration Rights Agreement, the
Convertible Subordinated Debentures and the Warrants by the Company and the
consummation by it of the transactions contemplated hereby have been duly
authorized by all necessary corporate action and no further consent or
authorization of the Company or its Board of Directors or stockholders is
required, and (c) this Agreement, the Registration Rights Agreement, the
Warrants and the Convertible Subordinated Debentures have been duly executed and
delivered by the Company and at the Closing shall constitute valid and binding
obligations of the Company enforceable against the Company in accordance with
their terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws relating to, or affecting generally the
enforcement of, creditors' rights and remedies or by other equitable principles
of general application. The Company has duly and validly authorized and reserved
for issuance shares of Common Stock sufficient in number for the conversion of
the Convertible Subordinated Debentures and the exercise of the Warrants. The
Company understands and acknowledges the potentially dilutive effect to the
Common Stock of the issuance of the Conversion Shares and Warrant Shares. The
Company further acknowledges that its obligation to issue Conversion Shares and
Warrant Shares upon conversion of the Convertible Subordinated Debentures and
Warrant Shares upon exercise of the Warrants in accordance with this Agreement
and the Convertible Subordinated Debentures, subject to Section 5.2 hereunder,
is absolute and unconditional regardless of the dilutive effect that such
issuance may have on the ownership interests of other stockholders of the
Company and notwithstanding the commencement of any case under 11 U.S.C. Section
101 et seq. (the "Bankruptcy Code"), the Company shall not seek judicial relief
from its obligations to convert the Convertible Subordinated Debentures or
exercise the Warrants except pursuant to the Bankruptcy Code. In the event the
Company is a debtor under the Bankruptcy Code, the Company hereby waives to the
fullest extent permitted any rights to relief it may have under 11 U.S.C.
Section 362 in respect of the conversion of the Convertible Subordinated
Debentures and the exercise of the Warrants. The Company agrees, without cost or
expense to the Investors, to the fullest extent permitted by law, to take or
consent to any and all action necessary to effectuate relief under 11 U.S.C.
Section 362.

Section 3.3. Capitalization. As of November 30, 2001, the authorized capital
stock of the Company consists of (a) 50,000,000 shares of Common Stock of which
9,274,981 shares are issued and outstanding and there have been no additional
issuances since such date except pursuant to the Company's employee stock option
plan, and (b) 20 million shares of Preferred Stock of which 1,038,961 shares are
designated Series A Convertible Preferred Stock of which 519,481 are issued and
outstanding. There are no outstanding Capital Shares Equivalents nor any
agreements or understandings pursuant to which any Capital Shares Equivalents
may become outstanding. The Company is not a party to any agreement granting
registration or anti-dilution rights to any person with respect to any of its
equity or debt securities. All of the outstanding shares of Common Stock of the
Company have been duly and validly authorized and issued and are fully paid and
non-assessable and have been issued pursuant to registration statements or valid
exemptions from registration under the Securities Act and all applicable state
"blue sky" laws.

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Section 3.4. Common Stock/Listing of Shares. The Company has registered its
Common Stock pursuant to Section 12(b) or (g) of the Exchange Act and is in full
compliance with all reporting requirements of the Exchange Act, and the Company
is in compliance with all requirements for the continued listing or quotation of
its Common Stock, and such Common Stock is currently listed or quoted on the
Principal Market. The Company has not received any notice from any trading
market or exchange on which the Common stock has been listed to the effect that
the Company is not in compliance with the rules and regulations of such trading
market or exchange and that the Common Stock may be delisted from trading
thereon. Subject to compliance with Section 5.2 hereunder, the issuance and
delivery of the Convertible Subordinated Debentures, Conversion Shares, Warrants
and Warrant Shares does not violate any of the rules or regulations of such
trading market or exchange or require shareholder approval.

Section 3.5. SEC Documents. The Company has made available to the Investors true
and complete copies of the SEC Documents. The Company has not provided to the
Investors any information that, according to applicable law, rule or regulation,
should have been disclosed publicly prior to the date hereof by the Company, but
which has not been so disclosed. As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the Exchange Act, and
rules and regulations of the SEC promulgated thereunder and the SEC Documents
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of the Company included in the SEC
Documents complied in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC or other
applicable rules and regulations with respect thereto at the time of such
inclusion. Such financial statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis during
the periods involved (except (a) as may be otherwise indicated in such financial
statements or the notes thereto or (b) in the case of unaudited interim
statements, to the extent they exclude footnotes or may be condensed or summary
statements) and fairly present in all material respects the financial position
of the Company as of the dates thereof and the results of operations and cash
flows for the periods then ended (subject, in the case of unaudited interim
statements, to normal year-end audit adjustments). Neither the Company nor any
of its subsidiaries has any material indebtedness, obligations or liabilities of
any kind (whether accrued, absolute, contingent or otherwise, and whether due or
to become due) that would have been required to be reflected in, reserved
against or otherwise described in the financial statements or in the notes
thereto in accordance with GAAP, which was not fully reflected in, reserved
against or otherwise described in the financial statements or the notes thereto
included in the SEC Documents or was not incurred in the ordinary course of
business consistent with the Company's past practices since the last date of
such financial statements. The Company is eligible to use Form S-3 to register
for resale with the SEC the Conversion Shares and Warrant Shares based in part
upon the representations of the Investors in Section 2.3.

Section 3.6. Exemption from Registration; Valid Issuances. Subject to the
accuracy of the Investors' representations in Article II, the sale of the
Convertible Subordinated Debentures and the Conversion Shares, the Warrants and
Warrant Shares will not require registration under the

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Securities Act and/or any applicable state securities law. When validly
converted in accordance with the terms of the Convertible Subordinated
Debentures and purchased in accordance with the terms of the Warrants, the
Conversion Shares and Warrant Shares will be duly and validly issued, fully
paid, and non-assessable. Neither the sales of the Convertible Subordinated
Debentures, the Conversion Shares, the Warrants and Warrant Shares pursuant to,
nor the Company's performance of its obligations under, this Agreement, the
Registration Rights Agreement or the Convertible Subordinated Debentures and the
Warrants will (a) result in the creation or imposition by the Company of any
liens, charges, claims or other encumbrances upon the Convertible Subordinated
Debentures, the Warrants or the Conversion Shares and Warrant Shares or, except
as contemplated herein or therein, any of the assets of the Company, or (b)
entitle the holders of Outstanding Capital Shares to preemptive or other rights
to subscribe for or acquire the Capital Shares or other securities of the
Company. The Convertible Subordinated Debentures, the Warrants and the
Conversion Shares and Warrant Shares, shall not subject the Investors to
personal liability to the Company or its creditors by reason of the possession
thereof.

Section 3.7. No General Solicitation or Advertising in Regard to this
Transaction. Neither the Company nor any of its affiliates nor, to the knowledge
of the Company, any person acting on its or their behalf (a) has conducted or
will conduct any general solicitation (as that term is used in Rule 502(c) of
Regulation D) or general advertising with respect to the sale of the Convertible
Subordinated Debentures or the Warrants, or (b) made any offers or sales of any
security or solicited any offers to buy any security under any circumstances
that would require registration of the Convertible Subordinated Debentures or
the Conversion Shares and the Warrants and Warrant Shares, under the Securities
Act.

Section 3.8. No Conflicts. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby, including without limitation the issuance of and payment of
interest upon the Convertible Subordinated Debentures, Warrants and the
Conversion Shares and Warrant Shares, do not and will not (a) result in a
violation of the Company's Articles of Incorporation or By-Laws or (b) conflict
with, or constitute a material default (or an event that with notice or lapse of
time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any material agreement,
indenture or instrument, or any "lock-up" or similar provision of any
underwriting or similar agreement to which the Company is a party, or (iii)
result in a violation of any federal, state or local law, rule, regulation,
order, judgment or decree (including federal and state securities laws and
regulations) applicable to the Company or by which any material property or
asset of the Company is bound or affected, nor is the Company otherwise in
violation of, conflict with or default under any of the foregoing (except in
each case for such conflicts, defaults, terminations, amendments, accelerations,
cancellations and violations as would not have, individually or in the
aggregate, a Material Adverse Effect). The business of the Company is not being
conducted in violation of any law, ordinance or regulation of any governmental
entity, except for possible violations that either singly or in the aggregate
would not have a Material Adverse Effect. The Company is not required under any
federal, state or local law, rule or regulation to obtain any consent,
authorization or order of, or make any filing or registration with, any court or
governmental agency in order for it to execute, deliver or perform any of its
obligations under this Agreement

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or issue and sell the Convertible Subordinated Debentures or the Warrants in
accordance with the terms hereof (other than any SEC or state securities filings
that may be required to be made by the Company subsequent to the Closing, or any
registration statement that may be filed pursuant hereto); provided that, for
purposes of the representation made in this sentence, the Company is assuming
and relying upon the accuracy of the relevant representations and agreements of
the Investors herein.

Section 3.9. No Material Adverse Change. Since the date of the financial
statements contained in the Company's most recently filed Form 10-Q or Form
10-K, no Material Adverse Effect has occurred or exists with respect to the
Company. No material supplier has given notice, oral or written, that it intends
to cease or reduce the volume of its business with the Company from historical
levels.

Section 3.10. No Undisclosed Events or Circumstances. Since the date of the
financial statements contained in the Company's most recently filed Form 10-Q or
Form 10-K, no event or circumstance has occurred or exists with respect to the
Company or its businesses, properties, prospects, operations or financial
condition, that, under any applicable law, rule or regulation, requires public
disclosure or announcement prior to the date hereof by the Company but which has
not been so publicly announced or disclosed in writing to the Investors.

Section 3.11. No Integrated Offering. Other than pursuant to an effective
registration statement under the Securities Act, or pursuant to the issuance or
exercise of employee stock options or in connection with certain acquisitions,
or pursuant to its discussion with the Investors in connection with the
transactions contemplated hereby, the Company has not issued, offered or sold
the Convertible Subordinated Debentures, the Warrants or any shares of Common
Stock (including for this purpose any securities of the same or a similar class
as the Convertible Subordinated Debentures, Warrants or Common Stock, or any
securities convertible into a exchangeable or exercisable for the Convertible
Subordinated Debentures or Common Stock or any such other securities) within the
six-month period next preceding the date hereof, and the Company shall not
permit any of its directors, officers or affiliates directly or indirectly to
take, any action (including, without limitation, any offering or sale to any
Person of the Convertible Subordinated Debentures or shares of Common Stock), so
as to make unavailable the exemption from Securities Act registration being
relied upon by the Company for the offer and sale to Investors of the
Convertible Subordinated Debentures (and the Conversion Shares) and the Warrants
(and the Warrant Shares) as contemplated by this Agreement.

Section 3.12. Litigation and Other Proceedings. There are no lawsuits or
proceedings pending or, to the knowledge of the Company, threatened, against the
Company or any subsidiary, nor has the Company received any written or oral
notice of any such action, suit, proceeding or investigation, which could
reasonably be expected to have a Material Adverse Effect. No judgment, order,
writ, injunction or decree or award has been issued by or, to the knowledge of
the Company, requested of any court, arbitrator or governmental agency which
could result in a Material Adverse Effect.

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Section 3.13. Insurance. The Company and each subsidiary maintains property and
casualty, general liability, workers' compensation, environmental hazard,
personal injury and other similar types of insurance, as necessary to conduct
its business, with financially sound and reputable insurers that is adequate,
consistent with industry standards and the Company's historical claims
experience. The Company has not received notice from, and has no knowledge of
any threat by, any insurer (that has issued any insurance policy to the Company)
that such insurer intends to deny coverage under or cancel, discontinue or not
renew any insurance policy currently in force.

Section 3.14. Tax Matters.

               (a)    The Company and each subsidiary has filed all Tax Returns,
        which it is required to file under applicable laws; all such Tax Returns
        are true and accurate in all material respects and have been prepared in
        compliance with all applicable laws except as could not reasonably be
        expected to have a Material Adverse Effect; the Company has paid all
        material Taxes due and owing by it or any subsidiary (whether or not
        such Taxes are required to be shown on a Tax Return) and have withheld
        and paid over to the appropriate taxing authorities all material Taxes
        which it is required to withhold from amounts paid or owing to any
        employee, stockholder, creditor or other third parties; and since June
        30, 2000, the charges, accruals and reserves for material Taxes with
        respect to the Company (including any provisions for deferred income
        taxes) reflected on the books of the Company are adequate to cover any
        Tax liabilities of the Company if its current tax year were treated as
        ending on the date hereof.

               (b)    No claim has been made by a taxing authority in a
        jurisdiction where the Company does not file tax returns that the
        Company or any subsidiary is or may be subject to taxation by that
        jurisdiction. There are, to the Company's knowledge, no foreign,
        federal, state or local tax audits or administrative or judicial
        proceedings pending or being conducted with respect to the Company or
        any subsidiary; no information related to Tax matters has been requested
        by any foreign, federal, state or local taxing authority; and, except as
        disclosed above, no written notice indicating an intent to open an audit
        or other review has been received by the Company or any subsidiary from
        any foreign, federal, state or local taxing authority. There are no
        material unresolved questions or claims concerning the Company's Tax
        liability.

               (c)    For purposes of this Section 3.14:

                      "Tax" or "Taxes" means federal, state, county, local,
                      foreign, or other income, gross receipts, ad valorem,
                      franchise, profits, sales or use, transfer, registration,
                      excise, utility, environmental, communications, real or
                      personal property, capital stock, license, payroll, wage
                      or other withholding, employment, social security,
                      severance, stamp, occupation, alternative or add-on
                      minimum, estimated and other material taxes of any kind
                      whatsoever (including, without limitation, deficiencies,
                      penalties, additions to tax, and interest attributable
                      thereto) whether disputed or not.

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                      "Tax Return" means any return, information report or
                      filing with respect to Taxes, including any schedules
                      attached thereto and including any amendment thereof.

Section 3.15. Property. Neither the Company nor any of its subsidiaries owns any
real property. Each of the Company and its subsidiaries has good and marketable
title to all personal property owned by it, free and clear of all liens,
encumbrances and defects except such as do not materially affect the value of
such property and do not materially interfere with the use made and proposed to
be made of such property by the Company; and to the Company's knowledge any real
property and buildings held under lease by the Company as tenant are held by it
under valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and intended to be made of such
property and buildings by the Company. The Company's present facilities are
adequate for the Company's reasonably foreseeable needs.

Section 3.16. Intellectual Property. Each of the Company and its subsidiaries
owns or possesses adequate and enforceable rights to use all patents, patent
applications, trademarks, trademark applications, trade names, service marks,
copyrights, copyright applications, licenses, know-how (including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) and other similar rights and proprietary
knowledge (collectively, "Intangibles") necessary for the conduct of its
business as now being conducted. To the Company's knowledge, neither the Company
nor any of its subsidiaries is infringing upon or in conflict with any right of
any other person with respect to any Intangibles. No adverse claims have been
asserted by any person as to the ownership or use of any Intangibles and the
Company has no knowledge of any basis for such claim.

Section 3.17. Internal Controls and Procedures. The Company maintains books and
records and internal accounting controls which provide reasonable assurance that
(a) all transactions to which the Company or any subsidiary is a party or by
which its properties are bound are executed with management's authorization; (b)
the recorded accounting of the Company's consolidated assets is compared with
existing assets at regular intervals; (c) access to the Company's consolidated
assets is permitted only in accordance with management's authorization; and (d)
all transactions to which the Company or any subsidiary is a party or by which
its properties are bound are recorded as necessary to permit preparation of the
financial statements of the Company in accordance with U.S. generally accepted
accounting principles.

Section 3.18. Payments and Contributions. Neither the Company, any subsidiary,
nor, to the Company's knowledge, any of its directors, officers or other
employees has (a) used any Company funds for any unlawful contribution,
endorsement, gift, entertainment or other unlawful expense relating to political
activity; (b) made any direct or indirect unlawful payment of Company funds to
any foreign or domestic government official or employee; (c) violated or is in
violation of any provision of the Foreign Corrupt Practices Act of 1977, as
amended; or (d) made any bribe, rebate, payoff, influence payment, kickback or
other similar payment to any person with respect to Company matters.

                                       11
<PAGE>

Section 3.19. Permits and Licenses. The Company holds all necessary permits and
licenses to conduct its business as currently conducted, except where the
failure to possess such permits or licenses could not, individually, or in the
aggregate, have a Material Adverse Effect. All of such permits and licenses are
in full force and effect and the Company is not in material violation of any
thereof.

Section 3.20. No Misrepresentation. The representations and warranties of the
Company contained in this Agreement, any schedule, annex or exhibit hereto and
instrument or certificate furnished by the Company to the Investors pursuant to
this Agreement, when taken as a whole, do not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.

Section 3.21. Related Party Transactions. The Company is not a party to any
agreement or transaction with any of its officers, directors, greater than 5%
shareholders or any "Affiliate" (as defined in SEC Rule 405) of any of said
persons that would require disclosure under Item 404 of Regulation S-K that was
not disclosed on the Company's most recent annual report on Form 10-K for its
most recently ended fiscal year or that will not be disclosed in the Company's
Form 10-K for its current fiscal year.

Section 3.22. Labor Relations. No material labor dispute exists or, to the
knowledge of the Company, is imminent with respect to any of the employees of
the Company.

                                   ARTICLE IV

                           COVENANTS OF THE INVESTORS

        Each Investor, severally and not jointly, covenants with the Company
that:

Limitations on Short Sales. The Investor agrees that it will not enter into any
Short Sales (as hereinafter defined) from the period commencing on the Closing
Date and ending on the date which all of the Convertible Subordinated Debenture
has been converted and all of the Warrant has been exercised and such Conversion
Shares and Warrant Shares are covered by the Registration Statement. For
purposes of this Section 4.1, a "Short Sale" by the Investor shall mean a sale
of Common Stock by the Investor that is marked as a short sale and that is made
at a time when there is no equivalent offsetting long position in Common Stock
held by the Investor. For purposes of determining whether there is an equivalent
offsetting long position in Common Stock held by the Investor, Conversion Shares
that have not yet been converted pursuant to the Convertible Subordinated
Debenture and Warrant Shares that have not yet been issued upon exercise of the
Warrant shall be deemed to be held long by the Investor, and the amount of
shares of Common Stock held in a long position shall be the number of Conversion
Shares issuable pursuant to the Convertible Subordinated Debenture assuming such
holder converted all the outstanding principal amount of the Convertible
Subordinated Debenture on such date, and (ii) with respect to Warrant Shares,
the number of Warrant Shares issuable pursuant to the Warrant. To the extent
that the foregoing sentence permits short sales, then such transactions

                                       12
<PAGE>

may only be effected in accordance with Rule 10a-1 under the 1934 Act, and in
any case such transactions would not create any daily low sales prices for the
Common Stock.

                                   ARTICLE V

                            COVENANTS OF THE COMPANY

Section 5.1. Registration Rights. The Company shall cause the Registration
Rights Agreement to remain in full force and effect and the Company shall comply
with the terms thereof.

Section 5.2. Reservation of Common Stock/Shareholder Approval. On any date
hereafter, in the event the number of Shares reserved, as to any Investor, is
less than 200% of the Conversion Shares necessary to convert all of such
Investor's Convertible Subordinated Debenture, based on the then applicable
Mandatory Conversion Price (as defined in the Convertible Subordinated
Debenture) assuming conversion of the entire outstanding principal amount of
such Convertible Subordinated Debenture at such time, and Warrant Shares to
exercise all of such Investor's Warrant (the "Trigger Amount"), then the Company
shall have seven (7) calendar days from such date to increase the number of
shares reserved as to such Investor above the Trigger Amount, unless to do so
the Company must authorize additional shares, in which case the Company shall
have sixty (60) calendar days from such date to increase the number of shares
authorized and reserved as to such Investor above the Trigger Amount. The
Company agrees to present a proposal for stockholder approval to permit the
Company to issue a number of Conversion Shares which is in excess of 19.99% of
the number of the Company's issued and outstanding shares of Common Stock on the
Closing Date ("NASD Limit") at a special meeting of the stockholders to be held
within sixty (60) calendar days of the date the Company became aware that the
number of Conversion Shares becomes greater than 125% of the NASD Limit, with
the recommendation of the Board of Directors that such proposal be approved,
unless at the date of such meeting, less than 2% of the principal amount of the
Convertible Subordinated Debentures remain issued and outstanding, in which
event the Company may withdraw such proposal from a vote by the stockholders.
Until the Company obtains shareholder approval to permit the Company to issue a
number of Conversion Shares which is in excess of 19.99% of the number of the
Company's issued and outstanding shares of Common Stock on the Closing Date, a
Convertible Subordinated Debenture shall not be convertible into that number of
Conversion Shares which will cause the Company to issue to an Investor more than
such Investor's pro-rata portion (in proportion to their respective initial
purchases of securities pursuant to this Agreement) of 19.99% of the number of
the Company's issued and outstanding shares of Common Stock on the first Closing
Date.

Section 5.3. Listing of Common Stock. The Company hereby agrees to use its
reasonable best efforts to maintain the listing of the Common Stock on a
Principal Market, and as soon as reasonably practicable following the Closing,
to apply to list the Conversion Shares and the Warrant Shares on the Principal
Market and use reasonable best efforts to get such shares listed. The Company
further agrees, if the Company applies to have the Common Stock traded on any
other Principal Market, it will include in such application the Conversion
Shares and the Warrant

                                       13
<PAGE>

Shares, and will take such other action as is necessary or desirable in the
opinion of the Investors to cause the Conversion Shares and Warrant Shares to be
listed on such other Principal Market as promptly as possible. The Company will
take all action to continue the listing and trading of its Common Stock on a
Principal Market and will comply in all respects with the Company's reporting,
filing and other obligations under the bylaws or rules of the Principal Market.

Section 5.4. Exchange Act Registration. The Company will cause its Common Stock
to continue to be registered under Section 12(b) or (g) of the Exchange Act,
will use its best efforts to comply in all respects with its reporting and
filing obligations under the Exchange Act, and will not take any action or file
any document (whether or not permitted by the Exchange Act or the rules
thereunder) to terminate or suspend such registration or to terminate or suspend
its reporting and filing obligations under said Act until the Investors have
disposed of all of their Registrable Securities.

Section 5.5. Legends. The certificates evidencing the Securities shall be free
of legends, except as set forth in Article VIII. If the Transfer Agent or the
Investor's broker-dealer requires an opinion of counsel from the Company's
counsel pursuant to the Instructions to Transfer Agent attached hereto to issue
new certificates free of the Securities Legend (as defined in Section 8.1) to an
Investor and Company's counsel fails to deliver such opinion to the Transfer
Agent within 2 Trading Days from receipt by Company's counsel of such a request
from the Transfer Agent or the Investor's broker-dealer, then the Company will
pay such Investor, pro rata on a weekly basis, as liquidated damages for such
failure and not as a penalty, 10% per week of the market value of the Common
Stock which would be issuable upon conversion of such Investor's Convertible
Subordinated Debenture upon the date of payment of such liquidated damages for
each week until such opinion is provided, notwithstanding the fact that the
Company has instructed the Transfer Agent to accept such an opinion from such
Investor's counsel.

Section 5.6. Corporate Existence; Conflicting Agreements. The Company will take
all steps necessary to preserve and continue the corporate existence of the
Company. The Company shall not enter into any agreement, the terms of which
agreement would restrict or impair the right or ability of the Company to
perform any of its obligations under this Agreement or any of the other
agreements attached as exhibits hereto.

Section 5.7. Issuance of Convertible Subordinated Debentures and Warrants. The
sale of the Convertible Subordinated Debentures, the Warrants and the issuance
of the Conversion Shares upon conversion and Warrant Shares upon the exercise of
the Warrants of the Convertible Subordinated Debentures shall be made in
accordance with the provisions and requirements of Section 4(2), 4(6) or
Regulation D and any applicable state securities law based in part on the
representations of the Investors made herein. The Company shall take all other
necessary action and proceedings as may be required and permitted by applicable
law, rule and regulation, for the legal and valid issuance of the Convertible
Subordinated Debentures, the Warrants and the issuance of the Conversion Shares
upon conversion and Warrants shares upon exercise to the Investors. The Company
shall make any necessary SEC and "blue sky" filings as may be required to be
made by the Company in connection with the sale of the Securities to the
Investors, and shall provide a copy thereof to the Investors promptly after such
filing.

                                       14
<PAGE>

Section 5.8. Mandatory Redemption. Subject to the terms and conditions set forth
in the Convertible Subordinated Debentures, commencing on the first Trading Day
after the later of (i) the 180th calendar day after the Closing Date, and (ii)
the first Trading Day following the 30 calendar day period after the Effective
Date and continuing on the first Trading Day after each 30 calendar day period
(a "Payment Period") thereafter (each such date, a "Mandatory Redemption Date"
and such redemption a "Mandatory Redemption"), the Company shall redeem, in the
aggregate, the greater of (i) $300,000 of the then outstanding principal balance
of the Convertible Subordinated Debentures as to the first fifteen (15) Payment
Periods and $500,000 (or such lesser amount if all outstanding principal amounts
of the Convertible Subordinated Debentures are being redeemed hereunder for such
Payment Period) of the then outstanding principal balance of the Convertible
Subordinated Debentures as to any Payment Periods thereafter, and (ii) a
pro-rata portion of the then outstanding principal balance of the Convertible
Subordinated Debentures (based on the number of full months remaining until the
Maturity Date and proportionate to the schedule in sub-section (i) above) at a
cash price equal to 100% of the principal amount of the Convertible Subordinated
Debentures being redeemed (such amount so redeemed, the "Mandatory Redemption
Amount").

Section 5.9. Pro-Rata Redemption/Forced Conversion. Upon any redemption or
forced conversion of any of the Convertible Subordinated Debentures, the Company
shall offer such redemption or forced conversion pro-rata among all Investors in
proportion to their respective current holdings of such securities pursuant to
this Agreement, except that, a redemption pursuant to Section 5.8 shall be in
proportion to their respective initial purchases of the Convertible Subordinated
Debentures, increased accordingly in the event any Convertible Subordinated
Debentures are no longer outstanding.

Section 5.10. Limitation on Future Financing. The Company agrees that, until 6
months following the Effective Date, it will not enter into any other sale of
its Capital Shares or other Capital Shares Equivalents at a discount to the
then-current market price (or securities which may be converted, exchanged,
reset or otherwise at a future discount to market price), except that, after the
Effective Date, the Company shall be permitted to enter into a fixed price sale
of its Capital Shares or Capital Shares Equivalents at a discount to the
then-current market price provided the securities may not be converted,
exchanged, reset or otherwise at a later date based on a variable market price.
The foregoing shall not prevent or limit the Company from granting equity
incentive awards pursuant to equity incentive and stock option plans approved by
the Company's Board of Directors or selling securities purchased pursuant to the
Company's Employee Stock Purchase Plan or engaging in any sale of securities (i)
pursuant to the exercise of options granted or to be granted under an employee
benefit plan which plan has been approved by the Company's Board of Directors,
(ii) pursuant to any compensatory plan for a full-time employee or key
consultant, (iii) in connection with a strategic partnership or other business
transaction, the principal purpose of which is not simply to raise money, (iv)
in a registered public offering by the Company which is underwritten by one or
more established investment banks (not including an equity line type financing),
or (v) with the prior written approval of a majority in interest of the
Investors, which will not be unreasonably withheld.

                                       15
<PAGE>

Section 5.11. Redemption of Series A Convertible Preferred Stock. On the
earliest possible date hereafter, but in no even later than February 15, 2002,
the Company shall have exercised its right to redeem all of the Company's
outstanding Series A Convertible Preferred Stock, subject to the Company's
Articles of Incorporation, as amended and restated, to Nevada corporate law and
such preferred stockholders right to convert thereunder.

Section 5.12. Redemption of Stock Pursuant to Company's Articles of
Incorporation. The Company will not redeem any of the Conversion Shares or
Warrant Shares pursuant to Article IX of its Amended and Restated Articles of
Incorporation unless it is required to do so by the Nevada Gaming Commission or
any other governmental agency or, in the good faith judgment of the Board of
Directors of the Company, a failure to do so would risk disciplinary action
against the Company by the Nevada Gaming Commission or any other governmental
agency.

                                   ARTICLE VI

                            SURVIVAL; INDEMNIFICATION

Section 6.1. Survival. The representations, warranties and covenants made by
each of the Company and each Investor in this Agreement, the annexes, schedules
and exhibits hereto and in each instrument, agreement and certificate entered
into and delivered by them pursuant to this Agreement, shall survive the Closing
and the consummation of the transactions contemplated hereby until the date the
applicable statute of limitations have run. In the event of a breach or
violation of any of such representations, warranties or covenants, the party to
whom such representations, warranties or covenants have been made shall have all
rights and remedies for such breach or violation available to it under the
provisions of this Agreement, irrespective of any investigation made by or on
behalf of such party on or prior to the Closing Date, unless such party had
actual knowledge of such breach or violation prior to the Closing Date.

Section 6.2. Indemnity.

               (a)    The Company hereby agrees to indemnify and hold harmless
        the Investors, their respective Affiliates and their respective
        officers, directors, partners and members (collectively, the "Investor
        Indemnitees"), from and against any and all Damages arising from any
        claims by third parties, and agrees to reimburse the Investor
        Indemnitees for all reasonable out-of-pocket expenses (including the
        reasonable fees and expenses of legal counsel), in each case promptly as
        incurred by the Investor Indemnitees and to the extent arising out of or
        in connection with:

               (i)    any misrepresentation, omission of fact or breach of any
                      of the Company's representations or warranties contained
                      in this Agreement, the annexes, schedules or exhibits
                      hereto or any instrument, agreement or certificate entered
                      into or delivered by the Company pursuant to this
                      Agreement; or

                                       16
<PAGE>

               (ii)   any failure by the Company to perform in any material
                      respect any of its material covenants, agreements,
                      undertakings or obligations set forth in this Agreement,
                      the annexes, schedules or exhibits hereto or any
                      instrument, agreement or certificate entered into or
                      delivered by the Company pursuant to this Agreement; or

               (iii)  any action instituted against the Investors, or any of
                      them or their respective Affiliates, by any stockholder of
                      the Company who is not an Affiliate of an Investor, with
                      respect to any of the transactions contemplated by this
                      Agreement.

               (b)    Each Investor, severally and not jointly, hereby agrees to
        indemnify and hold harmless the Company, its Affiliates and their
        respective officers, directors, partners and members (collectively, the
        "Company Indemnitees"), from and against any and all Damages arising
        from any claims by third parties, and agrees to reimburse the Company
        Indemnitees for all reasonable out-of-pocket expenses (including the
        reasonable fees and expenses of legal counsel), in each case promptly as
        incurred by the Company Indemnitees and to the extent arising out of or
        in connection with any misrepresentation, omission of fact, or breach of
        any of the Investor's representations or warranties contained in this
        Agreement, the annexes, schedules or exhibits hereto or any instrument,
        agreement or certificate entered into or delivered by the Investor
        pursuant to this Agreement. Notwithstanding anything to the contrary
        herein, an Investor shall be liable under this Section 6.2(b) for only
        that amount as does not exceed the net proceeds to such Investor as a
        result of the sale of the Registrable Securities pursuant to the
        Registration Statement.

Section 6.3. Notice. Promptly after receipt by any party hereto seeking
indemnification pursuant to Section 6.2 (an "Indemnified Party") of written
notice of any investigation, claim, proceeding or other action in respect of
which indemnification is being sought (each, a "Claim"), the Indemnified Party
promptly shall notify the party from whom indemnification pursuant to Section
6.2 is being sought (the "Indemnifying Party") of the commencement thereof; but
the omission to so notify the Indemnifying Party shall not relieve it from any
liability that it otherwise may have to the Indemnified Party, except to the
extent that the Indemnifying Party is actually prejudiced by such omission or
delay. If the Indemnifying Party so elects or at the request of an Indemnified
Party, the Indemnifying Party will assume the defense of such Claim, including
the employment of counsel reasonably satisfactory to such Indemnified Party and
the payment of all fees and expenses of such counsel. Notwithstanding the
assumption of the defense of any Claim by the Indemnifying Party, the
Indemnified Party shall have the right to employ separate legal counsel and to
participate in the defense of such Claim, and the Indemnifying Party shall bear
the reasonable fees, out-of-pocket costs and expenses of such separate legal
counsel to the Indemnified Party if (and only if): (a) the Indemnifying Party
shall have agreed to pay such fees, out-of-pocket costs and expenses, (b) the
Indemnified Party reasonably shall have concluded that representation of the
Indemnified Party and the Indemnifying Party by the same legal counsel would not
be appropriate due to actual or, as reasonably determined by legal counsel to
the Indemnified Party, potentially differing interests between such parties in
the conduct of the defense of such Claim, or if there may be legal

                                       17
<PAGE>

defenses available to the Indemnified Party that are in addition to or disparate
from those available to the Indemnifying Party, or (c) the Indemnifying Party
shall have failed to employ legal counsel reasonably satisfactory to the
Indemnified Party within a reasonable period of time after notice of the
commencement of such Claim. If the Indemnified Party employs separate legal
counsel in circumstances other than as described in clauses (a), (b) or (c)
above, the fees, costs and expenses of such legal counsel shall be borne
exclusively by the Indemnified Party. Except as provided above, the Indemnifying
Party shall not, in connection with any Claim in the same jurisdiction, be
liable for the fees and expenses of more than one firm of legal counsel for the
Indemnified Party (together with appropriate local counsel). The Indemnifying
Party shall not, without the prior written consent of the Indemnified Party
(which consent shall not unreasonably be withheld), settle or compromise any
Claim or consent to the entry of any judgment that does not include an
unconditional release of the Indemnified Party from all liabilities with respect
to such Claim or judgment.

        All fees and expenses of the Indemnified Party (including reasonable
costs of defense and investigation in a manner not inconsistent with this
Section and all reasonable attorneys' fees and expenses) shall be paid to the
Indemnified Party, as incurred, within ten (10) Trading Days of written notice
thereof to the Indemnifying Party (regardless of whether it is ultimately
determined that an indemnified party is not entitled to indemnification
hereunder; provided, that the Indemnifying Party may require such Indemnified
Party to undertake to reimburse all such fees and expenses to the extent it is
finally judicially determined that such Indemnified Party is not entitled to
indemnification hereunder).

Section 6.4. Direct Claims. In the event one party hereunder should have a claim
for indemnification that does not involve a claim or demand being asserted by a
third party, the Indemnified Party promptly shall deliver notice of such claim
to the Indemnifying Party. If the Indemnifying Party disputes the claim, such
dispute shall be resolved by mutual agreement of the Indemnified Party and the
Indemnifying Party or in accordance with Article IX. Judgment upon any award
rendered by any arbitrators may be entered in any court having competent
jurisdiction thereof.

                                   ARTICLE VII

                              DUE DILIGENCE REVIEW

Section 7.1. Non-Disclosure of Non-Public Information.

               (a)    The Company shall not disclose material non-public
        information to the Investors, advisors to or representatives of the
        Investors unless prior to disclosure of such information the Company
        identifies such information as being non-public information and provides
        the Investors, such advisors and representatives with the opportunity to
        accept or refuse to accept such non-public information for review. Other
        than disclosure of a portion of any comment letters received from the
        SEC staff with respect to the Registration Statement that pertain
        specifically to this transaction or the selling shareholders and their
        plan of distribution, the Company may, as a condition to disclosing

                                       18
<PAGE>

        any non-public information hereunder, require the Investors' advisors
        and representatives to enter into a confidentiality agreement in form
        and content reasonably satisfactory to the Company and the Investors.

               (b)    The Company will promptly notify the advisors and
        representatives of the Investors and, if any, underwriters, of any event
        or the existence of any circumstance (without any obligation to disclose
        the specific event or circumstance) of which it becomes aware,
        constituting material non-public information (whether or not requested
        of the Company specifically or generally during the course of due
        diligence by such persons or entities), which, if not disclosed in the
        prospectus included in the Registration Statement, would cause such
        prospectus to include a material misstatement or to omit a material fact
        required to be stated therein in order to make the statements, therein
        in light of the circumstances in which they were made, not misleading.
        Nothing contained in this Section 7.1 shall be construed to mean that
        persons or entities other than the Investors may not obtain non-public
        information in the course of conducting due diligence on behalf of the
        Investors and nothing herein shall prevent any such persons or entities
        from notifying the Company of their opinion that based on such due
        diligence by such persons or entities, that the Registration Statement
        contains an untrue statement of a material fact or omits a material fact
        required to be stated in the Registration Statement or necessary to make
        the statements contained therein, in light of the circumstances in which
        they were made, not misleading.

                                  ARTICLE VIII

                      LEGENDS; TRANSFER AGENT INSTRUCTIONS

Section 8.1. Legends.

               (a)    Unless otherwise provided below, each certificate
        representing Registrable Securities will bear the following legend or
        equivalent (the "Securities Legend"):

        THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
        UNDER THE U.S. SECURITIES ACT, AS AMENDED, OR ANY OTHER APPLICABLE
        SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM
        THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER
        SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION
        HEREIN MAY BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, OR
        OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
        STATEMENT UNDER THE SECURITIES ACT OR ACRES GAMING INCORPORATED SHALL
        HAVE RECEIVED AN OPINION OF COUNSEL THAT REGISTRATION OF SUCH SECURITIES
        UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE
        SECURITIES LAWS IS NOT REQUIRED.

                                       19
<PAGE>

        (b) Unless otherwise provided below, each certificate representing
Registrable Securities will bear the following legends or their equivalent (the
"Notice Legends"):

        UPON WRITTEN REQUEST, THE CORPORATION WILL FURNISH TO ANY SHAREHOLDER,
        WITHOUT CHARGE, A FULL STATEMENT OF THE DESIGNATION, PREFERENCE,
        LIMITATIONS AND RELATIVE RIGHTS APPLICABLE TO THE SHARES OF EACH CLASS
        OF STOCK AUTHORIZED TO BE ISSUED AND, WITH RESPECT TO ANY PREFERRED OR
        SPECIAL CLASS WHICH THE CORPORATION IS AUTHORIZED TO ISSUE IN SERIES,
        THE VARIATIONS IN RIGHTS, PREFERENCES AND LIMITATIONS FOR THE SHARES OF
        EACH SUCH SERIES, SO FAR AS THE SAME HAVE BEEN FIXED AND DETERMINED, AND
        THE AUTHORITY OF THE BOARD OF DIRECTORS TO FIX AND DETERMINE THE
        RELATIVE RIGHTS AND PREFERENCES OF SUBSEQUENT SERIES.

        THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO
        REDEMPTION BY THE COMPANY IN ACCORDANCE WITH ARTICLE IX OF THE COMPANY'S
        ARTICLES OF INCORPORATION.

Section 8.2. Removal of Legends. During any periods following the Effective Date
that the Registration Statement is effective, or otherwise in accordance with
the Registration Rights Agreement, the shares of Common Stock issued hereunder
shall not bear any Securities Legend and shall otherwise be freely transferable.
In the event the Company fails to deliver or cause its transfer agent to deliver
such shares to an Investor free of any Securities Legend or remove any such
legend from already issued shares of Common Stock, such Investor shall be
entitled to, in addition to any other rights hereunder or in the Convertible
Subordinated Debentures, the liquidated damages for late delivery of shares as
set forth in the Convertible Subordinated Debentures.

Section 8.3. Transfer Agent Instructions. Upon the execution and delivery
hereof, the Company is issuing to the transfer agent for its Common Stock (and
to any substitute or replacement transfer agent for its Common Stock upon the
Company's appointment of any such substitute or replacement transfer agent)
instructions substantially in the form of Exhibit E hereto. Such instructions
shall be irrevocable by the Company from and after the date hereof or from and
after the issuance thereof to any such substitute or replacement transfer agent,
as the case may be. The Company warrants that no instruction other than the
irrevocable transfer agent instructions referred to in this section shall be
given by the Company to the Company's transfer agent. After the Effective Date,
in lieu of delivering physical certificates representing the Common Stock
issuable upon the conversion of, or in lieu of interest payments on, the
Convertible Subordinated Debentures, the Company shall cause its transfer agent
to electronically transmit the Conversion Shares by crediting the account of the
Investor's prime broker with the Depository Trust Company ("DTC") Fast Automated
Securities Transfer program through its Deposit Withdrawal Agent Commission
("DWAC") system no later than the applicable date of delivery.

                                       20
<PAGE>

Section 8.4. No Other Legend or Stock Transfer Restrictions. No legend other
than those specified in Section 8.1 has been or shall be placed on the share
certificates representing the Registrable Securities and no instructions or
"stop transfer orders," "stock transfer restrictions," or other restrictions
have been or shall be given to the Company's transfer agent with respect thereto
other than as expressly set forth in this Article VIII. The Company acknowledges
that a breach by it of its obligation to remove any restrictive legends under
this Article VIII will cause irreparable harm to the Investors by vitiating the
intent and purpose of the transaction contemplated hereby. Accordingly, the
Company acknowledges that the remedy at law for a breach of its obligation
hereunder will be inadequate and agrees, in the event of a breach or threatened
breach by the Company of the provision under this Article VIII, that the
Investors shall be entitled, in addition to all other available remedies, to an
order and/or injunction restraining any breach and requiring immediate issuance
and transfer, without the necessity of showing economic loss and without any
bond or other security being required.

Section 8.5. Investors' Compliance. Nothing in this Article shall affect in any
way each Investor's obligations to comply with all applicable securities laws
upon resale of the Common Stock.

Section 8.6. Rule 144. Subject to the applicable securities laws, for the
purpose of calculating the holding period of the Shares under Rule 144, the
Conversion Shares and the Warrant Shares shall be deemed to have been acquired
on the Closing Date.

                                   ARTICLE IX

                                  CHOICE OF LAW

Section 9.1. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to contracts made
in New York by persons domiciled in New York City and without regard to its
principles of conflicts of laws. The Company and each of the Investors agree to
submit themselves to the in personam jurisdiction of the state and federal
courts situated within the Southern District of the State of New York with
regard to any controversy arising out of or relating to this Agreement. Any
party shall be entitled to obtain injunctive relief from a court in any case
where such relief is available, and the prevailing party in such injunctive
action shall be entitled to its reasonable attorneys' fees in connection
therewith. The non-prevailing party to any dispute hereunder shall pay the
expenses of the prevailing party, including reasonable attorneys' fees, in
connection with any such dispute.

Section 9.2. Specific Enforcement. The Company acknowledges and agrees that
irreparable damage would occur in the event that any of the provisions of this
Agreement or any of the exhibits hereto were not performed in accordance with
their specific terms or were otherwise breached, notwithstanding any reasons the
Company may have to the contrary in the future, including claims of solvency or
that the Investor is not put at risk absent performance by the Company. It is
accordingly agreed that the Investors shall be entitled to an injunction or
injunctions to prevent or cure material breaches of the provisions of this
Agreement and to

                                       21
<PAGE>

enforce specifically the terms and provisions hereof or thereof, this being in
addition to any other remedy to which any of them may be entitled by law or
equity. The prevailing party in such injunctive action shall be entitled to its
reasonable attorneys' fees in connection with any such specific performance.

                                    ARTICLE X

                                   ASSIGNMENT

Section 10.1. Assignment. Neither this Agreement nor any rights of the Company
hereunder may be assigned by the Company to any other person. The provisions of
this Agreement shall inure to the benefit of, and be enforceable by, any
permitted transferee of any of the Convertible Subordinated Debentures and
Warrants purchased or acquired by any Investor hereunder with respect to the
Convertible Subordinated Debentures and Warrants held by such person.

                                   ARTICLE XI

                                     NOTICES

Section 11.1. Notices. All notices, demands, requests, consents, approvals, and
other communications required or permitted hereunder shall be in writing and,
unless otherwise specified herein, shall be (a) hand delivered, (b) deposited in
the mail, registered or certified, return receipt requested, postage prepaid,
(c) delivered by reputable air courier service with charges prepaid, or (d)
transmitted by facsimile, addressed as set forth below or to such other address
as such party shall have specified most recently by written notice. Any notice
or other communication required or permitted to be given hereunder shall be
deemed effective (a) upon hand delivery or delivery by facsimile, with accurate
confirmation generated by the transmitting facsimile machine, at the address or
number designated below (if delivered on a business day during normal business
hours where such notice is to be received), or the first business day following
such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the first business day
following the date of sending by reputable courier service, fully prepaid,
addressed to such address, or (c) upon actual receipt of such mailing, if
mailed. The addresses for such communications shall be:

If to the Company:              7115 Amigo Street, Suite 150
                                Las Vegas, NV 89119
                                Attn: Chief Financial Officer
                                Tel: (702)-263-7588
                                Fax: (702) 263-7595

With copies to:                 Perkins Coie LLP
(which shall not constitute     1211 S.W. Fifth Avenue, Suite 1500
notice to the Company)          Portland, OR 97204-3715

                                       22
<PAGE>

                                Attn: Patrick J. Simpson
                                Tel: (503) 727-2035
                                Fax: (503) 727-2222

if to the Investors:            As set forth on the signature pages hereto

        Either party hereto may from time to time change its address or
facsimile number for notices under this Section 11.1 by giving written notice of
such changed address or facsimile number to the other party hereto as provided
in this Section 11.1.

                                       23
<PAGE>

                                   ARTICLE XII

                                  MISCELLANEOUS

Section 12.1. Counterparts/Facsimile/Amendments. This Agreement may be executed
in multiple counterparts, each of which may be executed by less than all of the
parties and shall be deemed to be an original instrument which shall be
enforceable against the parties actually executing such counterparts and all of
which together shall constitute one and the same instrument. Except for the
Convertible Subordinated Debentures or Warrants or as otherwise stated herein,
in lieu of the original documents, a facsimile transmission or copy of the
original documents shall be as effective and enforceable as the original. This
Agreement may be amended only by a writing executed by a majority in interest of
the Convertible Subordinated Debentures.

Section 12.2. Entire Agreement. This Agreement, the agreements attached as
exhibits hereto, which include the Convertible Subordinated Debentures, the
Warrants and the Registration Rights Agreement, set forth the entire agreement
and understanding of the parties relating to the subject matter hereof and
supersedes all prior and contemporaneous agreements, negotiations and
understandings between the parties, both oral and written relating to the
subject matter hereof.

Section 12.3. Severability. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that such severability shall be ineffective if
it materially changes the economic benefit of this Agreement to any party.

Section 12.4. Headings. The headings used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement.

Section 12.5. Number and Gender. There may be one or more Investors parties to
this Agreement, which Investors may be natural persons or entities. All
references to plural Investors shall apply equally to a single Investor if there
is only one Investor, and all references to an Investor as "it" shall apply
equally to a natural person.

Section 12.6. Reporting Entity for the Common Stock. The reporting entity relied
upon for the determination of the trading price or trading volume of the Common
Stock on any given Trading Day for the purposes of this Agreement shall be
Bloomberg Financial, L.P. or any successor thereto. The written mutual consent
of the Investors and the Company shall be required to employ any other reporting
entity.

Section 12.7. Replacement of Certificates. Upon (a) receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of a certificate representing the Convertible Subordinated Debentures
or any Conversion Shares or Warrants or any Warrant Shares and (b) in the case
of any such loss, theft or destruction of such certificate, upon delivery of an
indemnity agreement or security reasonably satisfactory in form to the Company
or as may

                                       24
<PAGE>

be required by the Company's Transfer Agent or (c) in the case of any such
mutilation, on surrender and cancellation of such certificate, the Company at
its expense will execute and deliver, in lieu thereof, a new certificate of like
tenor.

Section 12.8. Fees and Expenses. Each of the Company and the Investors agrees to
pay its own expenses incident to the performance of its obligations hereunder,
except that the Company shall pay the fees, expenses and disbursements of the
Investors; provided, however, that the Company shall pay $25,000 for the legal,
due diligence and administrative fees, expenses and disbursements of the
Investors, which, net of $12,500 of which the parties acknowledge has already
been advanced to the Investors by the Company, shall be deducted from the amount
payable by the Investors at the Closing.

Section 12.9. Finder's and Broker's Fees. Each of the parties hereto represents
that it has had no dealings in connection with this transaction with any finder
or broker who will demand payment of any fee or commission from the other party
except for the fees payable to Roth Capital Partners, LLC which fees shall be
paid by the Company out of the proceeds of the sale of the Convertible
Subordinated Debentures and Warrants to the Company. The Company on the one
hand, and the Investors, severally and not jointly, on the other hand, agree to
indemnify the other against and hold the other harmless from any and all
liabilities to any person claiming brokerage commissions or finder's fees on
account of services purported to have been rendered on behalf of the
indemnifying party in connection with this Agreement or the transactions
contemplated hereby.

Section 12.10. Publicity. The Company agrees that it will not issue any press
release or other public announcement, except as required by law, of the
transactions contemplated by this Agreement without the prior consent of the
Investors, which shall not be unreasonably withheld nor delayed by more than two
(2) Trading Days from their receipt of such proposed release. No release shall
name the Investors or any of their respective affiliates, representatives,
members, agents, associates, employees, consultants, companies, subsidiaries,
businesses and/or entities or agents without their express written consent.

                                  ARTICLE XIII

                               CERTAIN DEFINITIONS

Section 13.1. "Capital Shares" shall mean the Common Stock and any shares of any
other class of common stock whether now or hereafter authorized, having the
right to participate in the distribution of earnings and assets of the Company.

Section 13.2. "Capital Shares Equivalents" shall mean any securities, rights, or
obligations that are convertible into or exchangeable for or give any right to
subscribe for any Capital Shares of the Company or any warrants, options or
other rights to subscribe for or purchase Capital Shares or any such convertible
or exchangeable securities.

                                       25
<PAGE>

Section 13.3. "Closing" shall mean the closing of the purchase and sale of the
Convertible Subordinated Debentures and Warrants pursuant to Section 1.1.

Section 13.4. "Closing Date" shall mean the date on which all conditions to the
Closing have been satisfied (as defined in Section 1.1(b) hereto) and the
Closing shall have occurred.

Section 13.5. "Common Stock" shall mean the Company's common stock, par value
$.01 per share.

Section 13.6. "Conversion Shares" shall mean the shares of Common Stock issuable
upon conversion of the Convertible Subordinated Debentures and any shares
issuable as interest upon the Convertible Subordinated Debentures.

Section 13.7. "Convertible Subordinated Debenture(s)" shall mean the 6%
Convertible Subordinated Debenture(s) issued hereunder and due 24 months from
their date of issuance, unless otherwise provided for therein, in the form of
Exhibit A hereto.

Section 13.8. "Damages" shall mean any loss, claim, damage, judgment, penalty,
deficiency, liability, costs and expenses (including, without limitation,
reasonable attorneys' fees and disbursements and reasonable costs and expenses
of expert witnesses and investigation).

Section 13.9. "Effective Date" shall mean the date on which the SEC first
declares effective a Registration Statement registering the resale of the
Registrable Securities as set forth in the Registration Rights Agreement.

Section 13.10. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.

Section 13.11. "Legend" shall mean the legend set forth in Section 8.1.

Section 13.12. "Mandatory Redemption" shall have the meaning ascribed to such
term in Section 5.8.

Section 13.13. "Mandatory Redemption Amount" shall have the meaning ascribed to
such term in Section 5.8.

Section 13.14. "Mandatory Redemption Date" shall have the meaning ascribed to
such term in Section 5.8.

Section 13.15. "Material Adverse Effect" shall mean any effect on the business,
operations, properties or financial condition of the Company that is material
and adverse to the Company and its subsidiaries and affiliates, and/or any
condition, circumstance, or situation that would prohibit or otherwise interfere
with the ability of the Company to timely enter into and perform

                                       26
<PAGE>

any of its obligations under this Agreement, the Registration Rights Agreement,
the Convertible Subordinated Debentures or the Warrants in any material respect.

Section 13.16. "Maturity Date" shall mean the date on which the entire
outstanding principal amount and any accrued but unpaid interest of the
Convertible Subordinated Debentures are due and payable as set forth in the
Convertible Subordinated Debenture.

Section 13.17. "Outstanding" when used with reference to shares of Common Stock
or Capital Shares (collectively the "Shares"), shall mean, at any date as of
which the number of such Shares is to be determined, all issued and outstanding
Shares, and shall include all such Shares issuable in respect of outstanding
scrip or any certificates representing fractional interests in such Shares;
provided, however, that "Outstanding" shall not mean any such Shares then
directly or indirectly owned or held by or for the account of the Company.

Section 13.18. "Person" shall mean an individual, a corporation, a partnership,
a limited liability company, an association, a trust or other entity or
organization, including a government or political subdivision or an agency or
instrumentality thereof.

Section 13.19. "Principal Market" shall initially mean the Nasdaq Small-Cap
Market and shall also include the NASDAQ National Market, the American Stock
Exchange and the New York Stock Exchange, whichever is at the time the principal
trading exchange or market for the Common Stock, based upon share volume.

Section 13.20. "Purchase Price" shall mean the face principal amount of the
Convertible Subordinated Debentures.

Section 13.21. "Registrable Securities" shall mean the Warrant Shares and the
Conversion Shares until the earlier of the date that (i) the Registration
Statement has been declared effective by the SEC, and all Conversion Shares and
Warrant Shares have been disposed of pursuant to the Registration Statement,
(ii) all Conversion Shares and Warrant Shares have been sold under circumstances
under which all of the applicable conditions of Rule 144 (or any similar
provision then in force) under the Securities Act ("Rule 144") are met, (iii)
all Conversion Shares and Warrant Shares have been otherwise transferred to
holders who may trade such shares without restriction under the Securities Act,
and the Company has delivered a new certificate or other evidence of ownership
for such securities not bearing a restrictive legend or (iv) such time as, in
the opinion of counsel to the Company, all Conversion Shares and Warrant Shares
may be sold without any time, volume or manner limitations pursuant to Rule
144(k) (or any similar provision then in effect) under the Securities Act. In
the event of any merger, reorganization, consolidation, recapitalization or
other change in corporate structure affecting the Common Stock, such adjustment
shall be deemed to be made in the definition of "Registrable Security" as is
appropriate in order to prevent any dilution or enlargement of the rights
granted pursuant to this Agreement or the Registration Rights Agreement.

                                       27
<PAGE>

Section 13.22. "Registration Rights Agreement" shall mean the agreement
regarding the filing of the Registration Statement for the resale of the
Registrable Securities, entered into between the Company and the Investors, on
the date hereof in the form annexed hereto as Exhibit B.

Section 13.23. "Registration Statement" shall mean a registration statement on
Form S-3 (if use of such form is then available to the Company pursuant to the
rules of the SEC and, if not, on such other form promulgated by the SEC for
which the Company then qualifies and which counsel for the Company shall deem
appropriate, and which form shall be available for the resale by the Investors
of the Registrable Securities to be registered thereunder in accordance with the
provisions of this Agreement, the Registration Rights Agreement and in
accordance with the intended method of distribution of such securities), for the
registration of the resale by the Investors of the Registrable Securities under
the Securities Act.

Section 13.24. "Regulation D" shall have the meaning set forth in the recitals
of this Agreement.

Section 13.25. "SEC" shall mean the Securities and Exchange Commission.

Section 13.26. "SEC Documents" shall mean the Company's latest Form 10-K as of
the time in question, all Forms 10-Q and 8-K filed thereafter, all registration
statements filed as of the time in question, and the Proxy Statement for its
latest fiscal year as of the time in question until such time as the Company no
longer has an obligation to maintain the effectiveness of a Registration
Statement as set forth in the Registration Rights Agreement.

Section 13.27. "Section 4(2)" and "Section 4(6)" shall have the meanings set
forth in the recitals of this Agreement.

Section 13.28. "Securities Act" shall have the meaning as set forth in the
recitals of this Agreement.

Section 13.29. "Shares" shall have the meaning set forth in the definition of
"Outstanding" herein.

Section 13.30. "Trading Day" shall mean any day during which the Principal
Market shall be open for business.

Section 13.31. "VWAP" shall mean the daily volume weighted average price of the
Company's Common Stock on the Principal Market as reported by Bloomberg
Financial L.P. (based on a trading day from 9:30 a.m. ET to 4:02 p.m. Eastern
Time) using the VAP function on the date in question or if there is no such
price on such date, then the VWAP on the Principal Market on the date nearest
preceding such date, or (b) if the shares of Common Stock are not then listed or
quoted on the Principal Market, the closing sales price for a share of Common
Stock in the OTC Bulletin Board, as reported by the National Quotation Bureau
Incorporated or similar organization or agency succeeding to its functions of
reporting prices) at the close of business on such date, or (c) if the shares of
Common Stock are not then reported by the National Quotation

                                       28
<PAGE>

Bureau Incorporated (or similar organization or agency succeeding to its
functions of reporting prices), then the average of the "Pink Sheet" quotes for
the relevant conversion period, as determined in good faith by the board of
directors of the Company and the holders of a majority in interest of the
principal amount of Convertible Subordinated Debentures then outstanding, or (d)
if the shares of Common Stock are not then publicly traded the fair market value
of a share of Common Stock as determined by an appraiser selected in good faith
by the board of directors of the Company and the holders of a majority in
interest of the principal amount of Convertible Subordinated Debentures then
outstanding.

Section 13.32. "Warrant(s)" shall mean the Warrant(s) set forth in Section 1.2,
substantially in the form of Exhibit D hereto, to be issued to the Investors
pro-rata hereunder.

Section 13.33. "Warrant Shares" shall mean all shares of Common Stock or other
securities issued or issuable pursuant to exercise of the Warrants.

                           ***************************

                                       29
<PAGE>

           [SIGNATURE PAGE OF CONVERTIBLE SUBORDINATED DEBENTURES AND
                          WARRANTS PURCHASE AGREEMENT]

               IN WITNESS WHEREOF, the parties hereto have caused this Purchase
Agreement to be executed by the undersigned, thereunto duly authorized, as of
the date first set forth above.

                                       ACRES GAMING INCORPORATED

                                       By: /s/ Patrick Cavanaugh
                                           ------------------------------------
                                           Patrick Cavanaugh, Senior
                                           Vice-President, CFO

                                       INVESTORS:

Address for Notice:                    RIVERVIEW GROUP, LLC
-------------------
666 5th Avenue
8th Floor
New York, New York 10103               By: /s/ Terry Feeney
                                           ------------------------------------
Attn: Manager                              Name: Terry Feeney
Fax: (212) 841-6302                        Title: Chief Operating Officer

$2,500,000 principal amount and _________ Warrant Shares.

Address for Notice:                        OMICRON PARTNERS, LP
-------------------                    By: Omicron Capital L.P., as subadvisor
c/o Omicron Capital L.P.               By: Omicron Capital Inc., it general
153 E. 53rd Street                         partner
48th Floor
New York, New York 10022
Attn: Brian Daly                       By: /s/ Olivier Morali
Fax: (212) 508-7028                        ------------------------------------
                                           Olivier Morali, President

$1,000,000 principal amount and _________ Warrant Shares.

Address for Notice:                    DEEPHAVEN PRIVATE
-------------------                    PLACEMENT TRADING LTD.
c/o  Deephaven Capital
Management LLC
130 Cheshire Lane
Minnentonka, MN 55305
Attn: Bruce Lieberman                  By: /s/ Bruce Lieberman
Fax: (952) 249-5320                        ------------------------------------
                                       Name: Bruce Lieberman
                                       Title: Director Private Placement Trading

$1,500,000 principal amount and _________ Warrant Shares.

                                       30<PAGE>

                                                                     EXHIBIT 4.4

        THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
        UNDER THE U.S. SECURITIES ACT, AS AMENDED, OR ANY OTHER APPLICABLE
        SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM
        THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER
        SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION
        HEREIN MAY BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, OR
        OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
        STATEMENT UNDER THE SECURITIES ACT OR ACRES GAMING INCORPORATED SHALL
        HAVE RECEIVED AN OPINION OF COUNSEL FROM THE TRANSFEREE THAT
        REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE
        PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.

No. ___                                                         $_______________
Dated:  December 21, 2001

                            ACRES GAMING INCORPORATED

                      6% CONVERTIBLE SUBORDINATED DEBENTURE

                              DUE DECEMBER 21, 2003

THIS DEBENTURE is one of a series of duly authorized and issued debentures of
Acres Gaming Incorporated, a Nevada corporation, having a principal place of
business at 7115 Amigo Street, Suite 150, Las Vegas, NV 89119 (the "Company"),
designated as its 6% Convertible Subordinated Debentures (the "Debentures" and
this debenture, this "Debenture"), issued pursuant to the Convertible
Subordinated Debentures and Warrants Purchase Agreement, originally dated
December 21, 2001 among the Company and the investors signatory thereto (the
"Purchase Agreement"). CAPITALIZED TERMS NOT DEFINED IN SECTION 16 OR ELSEWHERE
IN THIS DEBENTURE SHALL HAVE THE MEANINGS ASCRIBED TO THEM IN THE PURCHASE
AGREEMENT.

        FOR VALUE RECEIVED, the Company promises to pay to ______________, or
its registered assigns (the "Holder"), the principal sum of _____________
Dollars ($______________),

<PAGE>

or such lesser amount reflecting the principal balance then-outstanding, on
December 21, 2003 or such earlier or later date as this Debenture is required or
permitted to be repaid as provided hereunder (the "Maturity Date") and to pay
interest to the Holder on the aggregate unconverted and then outstanding
principal amount of this Debenture at the rate of 6% per annum, payable in cash
or shares of Common Stock as set forth herein. On each conversion of this
Debenture, the Company and the Holder shall agree in writing as to the
unconverted principal amount then-outstanding following each such conversion.
Subject to the terms and conditions herein, the decision whether to pay interest
hereunder in registered shares of Common Stock or cash shall be at the
discretion of the Company. Semi-annual interest payments shall be due and
payable on April 30 and September 30 of each year, commencing with April 30,
2002. Not less than 10 Trading Days prior to the date such payment is due, the
Company shall provide the Holder with written notice of its election to pay
interest payments due hereunder either in cash or registered shares of Common
Stock (the Company may indicate in such notice that the election contained in
such notice shall continue for later periods until revised). Payment in shares
shall be based on the average of the VWAPs during the 5 Trading Days immediately
prior to the interest payment date and otherwise subject to conversions pursuant
to Section 4. Failure to timely provide such written notice shall be deemed an
election by the Company to pay interest in cash, except that, if the Company
shall not have delivered any cash due as payment of interest hereon by the third
Trading Day after the date such interest is due, the Holder may, by notice to
the Company, require the Company to issue shares of Common Stock, except that
for such purpose the conversion price applicable thereto shall be the lesser of
(A) the Mandatory Conversion Price on the Conversion Date, and (B) the Mandatory
Conversion Price on the date of the Holder's demand. Interest shall be
calculated on the basis of a 360-day year and shall accrue daily commencing on
the Original Issue Date until payment in full of the principal sum, together
with all accrued and unpaid interest and other amounts which may become due
hereunder, has been made. Interest hereunder will be paid to the Person in whose
name this Debenture is registered on the records of the Company regarding
registration and transfers of Debentures (the "Debenture Register"). All overdue
accrued and unpaid interest to be paid in cash hereunder shall entail a late fee
at the rate of 12% per annum (or such lower maximum amount of interest permitted
to be charged under applicable law) (the "Late Fee") (to accrue daily, from the
date such interest is due hereunder through and including the date of payment),
payable in cash.

        This Debenture is subject to the following additional provisions:

        Section 1. This Debenture is exchangeable for an equal aggregate
principal amount of Debentures of different authorized denominations, as
requested by the Holder surrendering the same but shall not be issuable in
denominations of less than integral multiples of Fifty Thousand Dollars
($50,000) unless such amount represents the full balance of Debentures
outstanding to such Holder. No service charge will be made for such registration
of transfer or exchange.

        Section 2. This Debenture has been issued subject to certain investment
representations of the original Holder set forth in the Purchase Agreement and
may be transferred or exchanged only in compliance with the Purchase Agreement
and the legend set forth on the face of this Debenture. Prior to due presentment
to the Company for transfer of this Debenture, the Company and any agent of the
Company may treat the Person in whose name this Debenture is duly registered on
the

                                       2
<PAGE>

Debenture Register as the owner hereof for the purpose of receiving payment as
herein provided and for all other purposes, whether or not this Debenture is
overdue, and neither the Company nor any such agent shall be affected by notice
to the contrary.

        Section 3. Events of Default.

               (a)    "Event of Default", wherever used herein, means any one of
        the following events (whatever the reason and whether it shall be
        voluntary or involuntary or effected by operation of law or pursuant to
        any judgment, decree or order of any court, or any order, rule or
        regulation of any administrative or governmental body):

                      (i)    any default in the payment of the principal of, or
               interest on, any Debentures, as and when the same shall become
               due and payable; or

                      (ii)   any of the representations or warranties made by
               the Company herein, in the Purchase Agreement, the Registration
               Rights Agreement, or in any agreement, certificate or financial
               statements heretofore furnished by the Company in connection with
               the execution and delivery of this Debenture or the Purchase
               Agreement shall be false or misleading in any material respect at
               the time made; or

                      (iii)  the Company (a) fails to issue Conversion Shares to
               the Holder or to cause its Transfer Agent to issue Conversion
               Shares, or, if applicable, cash, upon proper exercise by the
               Holder of the conversion rights of the Holder in accordance with
               the terms of this Debenture, (b) fails to transfer or to cause
               its Transfer Agent to transfer any certificate for Conversion
               Shares issued to the Holder as and when required by this
               Debenture or the Registration Rights Agreement, and such transfer
               is otherwise lawful, or (c) fails to remove any restrictive
               legend or to cause its Transfer Agent to transfer any certificate
               or any Conversion Shares issued to the Holder as and when
               required by this Debenture, the Purchase Agreement or the
               Registration Rights Agreement and such legend removal is
               otherwise lawful, and any such failure described in sub clauses
               (a), (b) or (c) shall continue uncured for five (5) business days
               of notice to the Company from the Holder of such a failure; or

                      (iv)   the Company shall fail to perform or observe, in
               any material respect, any other covenant, term, provision,
               condition, agreement or obligation of the Company under the
               Purchase Agreement, the Registration Rights Agreement or this
               Debenture including but not limited to the payments of interest
               (other than semi-annual interest payments), liquidated damages
               and Late Fees, provided the Holder has provided the Company
               notice and an opportunity to cure within ten (10) Trading Days of
               any such event of default under this Section 3(a)(iv); or

                      (v)    any governmental agencies or any court of competent
               jurisdiction at the instance of any governmental agency shall
               assume custody or control of the whole or any substantial portion
               of the properties or assets of the Company and such action shall
               not be dismissed within sixty (60) days thereafter; or

                                       3
<PAGE>

                      (vi)   any money judgment, writ or warrant of attachment,
               or similar process in excess of $250,000 in the aggregate shall
               be entered or filed against the Company or any of its properties
               or other assets and shall remain unpaid, unvacated, unbonded or
               unstayed for a period of sixty (60) days or in any event later
               than 5 days prior to the date of any proposed sale thereunder; or

                      (vii)  the Registration Statement is not declared
               effective by the SEC within one hundred eighty (180) days from
               the Closing; except that, if the only reason for the delay in
               effectiveness relates to the Holder's affiliation with a
               registered broker-dealer, the disclosure of the individuals that
               exercise voting and/or investment powers over the shares of
               Common Stock to be sold by the Holders or the disclosure of the
               Holder's beneficial ownership of the Common Stock, such period
               shall be tolled accordingly; or

                      (viii) the Company or any of its respective subsidiaries
               shall commence, or there shall be commenced against any of them a
               case under any applicable bankruptcy or insolvency laws as now or
               hereafter in effect or any successor thereto, or the Company or
               any of its respective subsidiaries commences any other proceeding
               under any reorganization, arrangement, adjustment of debt, relief
               of debtors, dissolution, insolvency or liquidation or similar law
               of any jurisdiction whether now or hereafter in effect relating
               to the Company or any of its respective subsidiaries or there is
               commenced against the Company or any of its respective
               subsidiaries any such bankruptcy, insolvency or other proceeding
               which remains undismissed for a period of 60 days; or the Company
               or any of its respective subsidiaries is adjudicated insolvent or
               bankrupt; or any order of relief or other order approving any
               such case or proceeding is entered; or the Company or any of its
               respective subsidiaries suffers any appointment of any custodian
               or the like for it or any substantial part of its property which
               continues undischarged or unstayed for a period of 60 days; or
               the Company or any of its subsidiaries makes a general assignment
               for the benefit of creditors; or the Company or any of its
               subsidiaries shall fail to pay, or shall state that it is unable
               to pay, or shall be unable to pay, its debts generally as they
               become due; or the Company or any of its subsidiaries shall call
               a meeting of its creditors with a view to arranging a
               composition, adjustment or restructuring of its debts; or the
               Company or any of its subsidiaries shall by any act or failure to
               act expressly indicate its consent to, approval of or
               acquiescence in any of the foregoing; or any corporate or other
               action is taken by the Company or any of its subsidiaries for the
               purpose of effecting any of the foregoing; or

                      (ix)   the Company (or any subsidiary thereof if
               guaranteed by the Company) shall default in any of its
               obligations under any other Debenture or any mortgage, credit
               agreement or other facility, indenture agreement, factoring
               agreement or other instrument under which there may be issued, or
               by which there may be secured or evidenced any indebtedness for
               borrowed money or money due under any long term leasing or
               factoring arrangement of the Company in an amount exceeding an

                                       4
<PAGE>

               aggregate of $250,000, whether such indebtedness now exists or
               shall hereafter be created and such default shall result in such
               indebtedness becoming or being declared due and payable prior to
               the date on which it would otherwise become due and payable; or

                      (x)    the Common Stock shall be delisted from the
               Principal Market or suspended from trading on the Principal
               Market without resuming trading and/or being relisted or thereon
               or listed on another Principal Market or having such suspension
               lifted, in either case, for more than either three (3)
               consecutive Trading Days or five (5) Trading Days in the
               aggregate during any twelve (12) month period (which need not be
               consecutive Trading Days); or

                      (xi)   the Company shall be a party to any Change of
               Control Transaction, shall agree to sell or dispose all or in
               excess of 40% of its assets in one or more transactions (whether
               or not such sale would constitute a Change of Control
               Transaction), or shall redeem or repurchase more than a de
               minimis number of shares of Common Stock or other equity
               securities of the Company except for redemptions or repurchases
               pursuant to an employee stock option or stock plan of the Company
               or that do not have a material adverse effect on the Holder; or

                      (xii)  the Company shall have suspended the Holder's
               conversion rights for more than four (4) Trading Days in the
               aggregate during any 12 month period (provided, however, that
               this Event of Default shall not be deemed to grant the Company
               any right to any such suspensions) except that a suspension
               pursuant to Section 3(h) of the Registration Rights Agreement
               relating to a blackout period alone shall not trigger this Event
               of Default; or

                      (xiii) if the effectiveness of the Registration Statement
               lapses for any reason or the Holder shall not be permitted to
               resell Registrable Securities (as defined in the Registration
               Rights Agreement) under the Registration Statement, in either
               case, for more than 30 Trading Days, in the aggregate, during any
               12 month period; except that, if the only reason for the delay in
               effectiveness relates to the Holder's affiliation with a
               registered broker-dealer, the disclosure of the individuals that
               exercise voting and/or investment powers over the shares of
               Common Stock to be sold by the Holders or the disclosure of the
               Holder's beneficial ownership of the Common Stock, such period
               shall be tolled accordingly.

               (b)    During the time that any portion of this Debenture remains
        outstanding, if any Event of Default occurs and is continuing, unless
        such Event of Default shall have been waived in writing by the Holder
        (which waiver shall not be deemed to be a waiver of any subsequent
        default) at the option of the Holder and in the Holder's sole
        discretion, the Holder may consider this Debenture immediately due and
        payable in cash, without presentment, demand, protest or notice of any
        kind, all of which are hereby expressly waived, anything herein or in
        any note or other instruments contained to the contrary notwithstanding,
        and the

                                       5
<PAGE>

        Holder may immediately enforce any and all of the Holder's rights and
        remedies provided herein or any other rights or remedies afforded by
        law. The aggregate amount payable upon an Event of Default shall be
        equal to the Mandatory Default Amount. Interest shall accrue on the
        amount due hereunder from the seventh day after such amount is due
        (being the date of an Event of Default) through the date of redemption
        in full thereof at the rate of 12% per annum (or such lesser maximum
        amount that is permitted to be paid by applicable law), to accrue daily
        from the date such payment is due hereunder through and including the
        date of payment. All Debentures and Conversion Shares for which the full
        redemption price hereunder shall have been paid in accordance herewith
        shall promptly be surrendered to or as directed by the Company. The
        Holder need not provide and the Company hereby waives any presentment,
        demand, protest or other notice of any kind, and the Holder may
        immediately and without expiration of any grace period enforce any and
        all of its rights and remedies hereunder and all other remedies
        available to it under applicable law. Such declaration may be rescinded
        and annulled by Holder at any time prior to payment hereunder. No such
        rescission or annulment shall affect any subsequent Event of Default or
        impair any right consequent thereon.

        Section 4. Conversion.

               (a)    Right to Convert

                      (i)    CONVERSION AT OPTION OF HOLDER. At the option of
               the Holder, subject to the provisions of Section 3(h) in the
               Registration Rights Agreement, this Debenture shall be
               convertible into Conversion Shares, in whole or in part, at any
               time and from time to time, after the Original Issue Date
               (subject to the limitations on conversion set forth in Section
               4). The number of Conversion Shares issuable hereunder shall be
               determined by dividing (1) the outstanding principal amount of
               this Debenture to be converted by (2) $4.6433 (110% of the
               average of the VWAPs during the 5 consecutive Trading Days
               immediately prior to the Original Issue Date)(subject to
               adjustments herein)(the "Set Price"), provided that if the
               Company has not elected to pay the accrued and unpaid interest on
               such Debenture in shares of Common Stock within the prescribed
               time period, then the number of shares shall be determined by
               dividing the outstanding principal amount of this Debenture to be
               converted plus the amount of such interest by the Set Price.

                      (ii)   CONVERSION AT THE OPTION OF THE COMPANY. Subject to
               the limitations herein, if, after the Original Issue Date, the
               closing bid price of the Common Stock on the Principal Market (as
               reported by Bloomberg Financial L.P.) for 20 consecutive Trading
               Days (the "Trigger Period") is greater than 175% of the Set
               Price, then the Company shall have the right, within 5 calendar
               days of the Trigger Period, to cause the Holder to convert all or
               part of the principal amount then outstanding of this Debenture
               at the Set Price plus any accrued but unpaid interest at the
               average of the VWAPs during the 5 Trading Days immediately prior
               to the Mandatory Conversion Date (as defined below) by providing
               prior written notice to

                                       6
<PAGE>

               the Holder (the "Mandatory Conversion Notice") setting forth (i)
               the "Mandatory Conversion Date," which is the date upon which the
               conversion of the Debentures will occur and which date must be
               within 45 calendar days of the Trigger Period and no less than 30
               calendar days from the end of the Trigger Period, and (ii) the
               principal amount of this Debenture to be converted; provided,
               however, that this provision shall not relieve the Company of any
               of its obligations hereunder, including its obligation to make
               any Mandatory Redemptions which become due pursuant to Section 5
               prior to the Mandatory Conversion Date or limit the Holder's
               right to convert any portion of this Debenture pursuant to
               Section 4(a)(i); provided, further, the Company may only deliver
               a Mandatory Conversion Notice to the Holder if, on the date of
               the Mandatory Conversion Notice, (i) there is an effective
               Registration Statement pursuant to which the Holder is permitted
               to utilize the prospectus thereunder to resell all of the
               Conversion Shares issued to the Holder and all of the Conversion
               Shares as are issuable to the Holder upon conversion in full of
               the Debentures subject to the Mandatory Conversion Notice are
               registered for resale by the Holder (and the Company believes, in
               good faith, that such effectiveness will continue uninterrupted
               for the foreseeable future), (ii) the Common Stock is listed for
               trading on a Principal Market (and the Company believes, in good
               faith, that trading of the Common Stock on the Principal Market
               will continue uninterrupted for the foreseeable future) and (iii)
               the closing bid price of the Common Stock on the Principal Market
               (as reported by Bloomberg Financial L.P.) is not less than 125%
               of the Set Price. If any of the foregoing conditions shall cease
               to be in effect on any day between the date of the Mandatory
               Conversion Notice and the Mandatory Conversion Date, then the
               Holder subject to such Mandatory Conversion Notice may elect, by
               written notice to the Company given at any time after any of the
               foregoing conditions shall cease to be in effect, to invalidate
               ab initio such conversion, notwithstanding anything herein
               contained to the contrary. The Company shall have the right to
               effect only one conversion pursuant to a Mandatory Conversion
               Notice hereunder in any twelve (12) month period, except that, in
               the event any such conversion is limited by Section 4(d)(i), the
               Company shall have the right to effect an additional conversion
               pursuant to a Mandatory Conversion Notice to the extent such
               prior conversion was limited. Nothing in this Section 4(a)(ii)
               shall be deemed to restrict or otherwise limit the Holder's right
               to convert any portion of the outstanding principal amount of the
               Debenture at any time pursuant to Section 4(a)(i), whether or not
               such principal amount is subject to a Mandatory Conversion
               Notice.

                      (iii)  Notwithstanding anything to the contrary contained
               herein, if on any Conversion Date:

                             (A)    the Common Stock is not listed or quoted on
                      a Principal Market;

                                       7
<PAGE>

                             (B)    the Company has failed to timely satisfy its
                      conversion obligations hereunder with respect to
                      Debentures submitted for conversion on such conversion
                      date; or

                             (C)    the issuance of such shares of Common Stock
                      would result in a violation of Sections 4(d)(ii).

                      then, at the option of the Holder, the Company, in lieu of
               delivering Conversion Shares, shall deliver, within three (3)
               Trading Days of each applicable Conversion Date, an amount in
               cash equal to the product of the number of Conversion Shares
               otherwise deliverable to the Holder in connection with such
               Conversion Date and the highest VWAP during the period commencing
               on the Conversion Date and ending on the Trading Day prior to the
               date such payment is made.

               (b)    Failure to Register Shares. Notwithstanding anything in
        Section 4(a) to the contrary, in addition to all other rights and
        remedies hereunder and in the Purchase Agreement, if the Registration
        Statement is not declared effective for any reason within one hundred
        fifty (150) days following the Original Issue Date primarily for reasons
        other than those relating to any disclosure in the Registration
        Statement relating to the Holder, the Holder shall have the right to
        convert, at any time, from time to time thereafter, all or part of the
        then outstanding balance of this Debenture at the Mandatory Conversion
        Price.

               (c)    Conversion Procedure.

                      (i)    OPTIONAL CONVERSION NOTICES. The Holder shall
               effect conversions by surrendering, if applicable, this Debenture
               (but only if the Holder is converting the entire outstanding
               principal amount of this Debenture), together with the form of
               conversion notice attached hereto (a "Conversion Notice") to the
               Company and the Company's transfer agent. Each Conversion Notice
               shall specify the principal amount of this Debenture to be
               converted and the date on which such conversion is to be
               effected, which date may not be prior to the date such Conversion
               Notice is deemed to have been delivered hereunder (a "Optional
               Conversion Date"). If the Holder is converting less than all of
               the principal amount represented by this Debenture, the Holder
               shall convert at least $50,000 in principal amount of this
               Debenture. If no Optional Conversion Date is specified in a
               Conversion Notice, the Optional Conversion Date shall be the date
               that such Conversion Notice is deemed delivered hereunder. Unless
               otherwise provided for by the terms hereunder, each Conversion
               Notice, once given, shall be irrevocable. If the Holder is
               converting less than all of the principal amount represented by
               this Debenture, it shall not be required to surrender this
               Debenture but may exercise its right to convert solely by the
               delivery of a Conversion Notice. If a conversion hereunder cannot
               be effected in full for any reason, the Company shall honor such
               conversion to the extent permissible hereunder. At anytime the
               Holder may elect, upon delivery of this Debenture to the

                                       8
<PAGE>

               Company, to receive a new Debenture for such principal amount as
               has not been converted.

                      (ii)   MANDATORY CONVERSION NOTICES. The Holder shall
               surrender, if applicable, this Debenture (but only if the Company
               is converting the entire outstanding principal amount of this
               Debenture) to the Company prior to the Mandatory Conversion Date.
               If the Holder fails for any reason to deliver the Debenture prior
               to the Mandatory Redemption Date, this Debenture will be
               cancelled and converted as set forth in the Mandatory Conversion
               Notice. If the Company is converting less than all of the
               principal amount represented by this Debenture, the Holder shall
               not be required to surrender this Debenture. At any time the
               Holder may elect, upon delivery of this Debenture to the Company,
               to receive a new Debenture for such principal amount as has not
               been converted.

                      (iii)  DELIVERY OF CONVERSION SHARES. Not later than three
               (3) Trading Days after any Conversion Date, the Company will
               deliver to the Holder, at an address in the United States
               supplied by the Holder, (A) a certificate or certificates which
               shall be free of restrictive legends and trading restrictions
               (other than those permitted by the Purchase Agreement)
               representing the number of shares of Common Stock being acquired
               upon the conversion of this Debenture (subject to the limitations
               set forth in Section 4(d) hereof), (B) if applicable, a new
               Debenture in a principal amount equal to the principal amount of
               Debentures not converted (if the Holder elects to surrender this
               Debenture and a principal amount remains outstanding after
               conversion), and (C) a bank wire or a bank or certified check in
               the amount of accrued and unpaid interest (if the Company is
               required to pay accrued interest in cash). The Company shall,
               upon request of the Holder, if available, use its best efforts to
               deliver any certificate or certificates required to be delivered
               by the Company under this Section electronically through the
               Depository Trust Corporation or another established clearing
               corporation performing similar functions.

                      (iv)   FAILURE TO DELIVER CONVERSION SHARES IN A TIMELY
               MANNER. If the Company fails for any reason to deliver to the
               Holder such certificate or certificates by the third Trading Day
               after the Conversion Date in accordance with Section 4(c)(iii)
               (or, in the event that shares are to be delivered in certificated
               form, the obligation of the Company to deliver such shares
               without any restrictive legend (except as permitted by the
               Purchase Agreement) within five Trading Days after the Conversion
               Date), the Company shall pay to such Holder, in cash, as
               liquidated damages and not as a penalty, for each $5,000 of
               principal amount being converted, $50 per Trading Day (increasing
               to $100 per Trading Day after 3 Trading Days and increasing to
               $200 per Trading Day 6 Trading Days after such damages begin to
               accrue) after such third Trading Day until such certificates are
               delivered; provided, however, in the event the Holder elects to
               rescind a conversion notice, liquidated damages shall accrue only
               up to the date of such rescission notice but not thereafter with
               respect to such rescinded conversion. If in the case of any
               conversion hereunder

                                       9
<PAGE>

               such certificate or certificates are not delivered to or as
               directed by the applicable Holder by the third Trading Day after
               a Conversion Date, the Holder shall be entitled by written notice
               to the Company at any time on or before its receipt of such
               certificate or certificates thereafter, to rescind such
               conversion, in which event the Company shall immediately return
               the certificates representing the principal amount of Debentures
               tendered for conversion. Nothing herein shall limit a Holder's
               right to pursue actual damages or declare an Event of Default
               pursuant to Section 3 herein for the Company's failure to deliver
               certificates representing shares of Common Stock upon conversion
               within the period specified herein and such Holder shall have the
               right to pursue all remedies available to it at law or in equity
               including, without limitation, a decree of specific performance
               and/or injunctive relief. The exercise of any such rights shall
               not prohibit the Holders from seeking to enforce damages pursuant
               to any other Section hereof or under applicable law. The Company
               acknowledges that a breach by it of its obligation to honor
               conversions under this Debenture will cause irreparable harm to
               the Investors by vitiating the intent and purpose of the
               transaction contemplated hereby. Accordingly, the Company
               acknowledges that the remedy at law for a breach of its
               obligation pursuant to this Section 4 will be inadequate and
               agrees, in the event of a breach or threatened breach by the
               Company of the provision under this Debenture, that the Investors
               shall be entitled, in addition to all other available remedies,
               to an order and/or injunction restraining any breach and
               requiring immediate issuance and transfer, without the necessity
               of showing economic loss and without any bond or other security
               being required.

                      (v)    BUY-IN. In addition to any other rights available
               to the Holder, if the Company fails to deliver to the Holder such
               certificate or certificates by the third Trading Day after the
               Conversion Date in accordance with Section 4(c)(ii), and if after
               such third Trading Day the Holder purchases (in an open market
               transaction or otherwise) Common Stock to deliver in satisfaction
               of a sale by such Holder of the Conversion Shares which the
               Holder anticipated receiving upon such conversion (a "Buy-In"),
               then the Company shall (A) pay in cash to the Holder (in addition
               to any remedies available to or elected by the Holder) the amount
               by which (x) the Holder's total purchase price (including
               brokerage commissions, if any) for the Common Stock so purchased
               exceeds (y) the product of (1) the aggregate number of shares of
               Common Stock that such Holder anticipated receiving from the
               conversion at issue multiplied by (2) the market price of the
               Common Stock at the time of the sale giving rise to such purchase
               obligation, and (B) at the option of the Holder, (x) deliver the
               Conversion Shares not yet delivered under the Conversion Notice
               and subject to this provision, or (y) reinstate the principal and
               interest of this Debenture subject to such Conversion Notice. For
               example, if the Holder purchases Common Stock having a total
               purchase price of $11,000 to cover a Buy-In with respect to an
               attempted conversion of this Debentures with respect to which the
               market price of the Conversion Shares on the date of conversion
               was a total of $10,000, the Company shall be required to pay the
               Holder $1,000. The Holder shall provide the Company

                                       10
<PAGE>

               written notice indicating the amounts payable to the Holder in
               respect of the Buy-In and the basis for determining such amount.
               Notwithstanding anything contained herein to the contrary, if a
               Holder requires the Company to make payment in respect of a
               Buy-In for the failure to timely deliver certificates hereunder
               and the Company timely pays in full such payment, the Company
               shall not be required to pay such Holder liquidated damages under
               Section 4(c)(iii) in respect of the certificates resulting in
               such Buy-In.

               (d)    Conversion Restrictions.

                      (i)    BENEFICIAL OWNERSHIP LIMITATION. Notwithstanding
               anything herein to the contrary, the Holder may not convert, and
               the Company may not cause the Holder to convert, this Debenture
               or receive shares of Common Stock as payment of interest
               hereunder to the extent such conversion or receipt of such
               interest payments would result in the Holder, together with any
               affiliate thereof, beneficially owning (as determined in
               accordance with Section 13(d) of the Exchange Act and the rules
               promulgated thereunder) in excess of 4.999% of the then issued
               and outstanding shares of Common Stock, including shares issuable
               upon conversion of, and payment of interest on, this Debenture or
               any other debenture of the Company held by such Holder after
               application of this Section. Since the Holder will not be
               obligated to report to the Company the number of shares of Common
               Stock it may hold at the time of a conversion hereunder, unless
               the conversion at issue would result in the issuance of shares of
               Common Stock in excess of 4.999% of the then outstanding shares
               of Common Stock without regard to any other shares which may be
               beneficially owned by the Holder or an affiliate thereof, the
               Holder shall have the authority and obligation to determine
               whether the restriction contained in this Section will limit any
               particular conversion hereunder and to the extent that the Holder
               determines that the limitation contained in this Section applies,
               the determination of which portion of the principal amount of
               this Debenture is convertible shall be the responsibility and
               obligation of the Holder. If the Holder has delivered a
               Conversion Notice for a principal amount of this Debenture that,
               without regard to any other shares that the Holder or its
               affiliates may beneficially own, would result in the issuance in
               excess of the permitted amount hereunder, the Company shall
               notify the Holder of this fact and shall honor the conversion for
               the maximum principal amount permitted to be converted on such
               Conversion Date in accordance with this Section. If this
               Debenture was not surrendered on the Conversion Date, the Company
               shall provide the Holder written notice of the amount actually
               converted. If the Holder surrendered this Debenture on the
               Conversion Date, the Company shall, at the option of the Holder,
               either retain any principal amount tendered for conversion in
               excess of the permitted amount hereunder for future conversions
               or return such excess principal amount to the Holder. The
               provisions of this Section may be waived by a Holder (but only as
               to itself and not to any other Holder) upon not less than 61 days
               prior notice to the Company. Other Holders shall be unaffected by
               any such waiver.

                                       11
<PAGE>

                      (ii)   LIMITATION ON NUMBER OF SHARES ISSUABLE.
               Notwithstanding anything herein to the contrary, the Company
               shall not be required to issue to the Holder and any other
               holders of the Debentures, Common Stock in excess of 19.999% of
               the Company's outstanding Common Stock on the Closing Date at a
               price below the market price of the Common Stock on the Closing
               Date, or such greater number of shares of Common Stock permitted
               pursuant to Nasdaq Rule 4350(i), as confirmed in writing by
               counsel to the Company, upon conversion of the Debentures (the
               "Maximum Aggregate Share Amount"), unless the Company first
               obtains shareholder approval permitting such issuances in
               accordance with Nasdaq rules. If the number of shares of Common
               Stock which would, notwithstanding the limitation set forth
               herein, be issuable and sold to the Holder equals or exceeds the
               Maximum Aggregate Share Amount, then, at any time, from time to
               time thereafter at the sole election of the Holder, in whole or
               in part, the Company shall: (i) honor the conversion of this
               Debenture by the Holder at the lowest possible conversion price
               which would permit such conversion without violating Nasdaq Rule
               4350(i), and (ii) redeem the portion of this Debenture submitted
               to the Company, the conversion of which would exceed the Maximum
               Aggregate Share Amount, otherwise in accordance with Section
               5(a).

               (e)    Anti-Dilution Provisions.

                      (i)    DIVIDENDS, STOCK SPLITS, ETC. If the Company, at
               any time while this Debenture is outstanding, (A) shall pay a
               stock dividend or otherwise make a distribution or distributions
               on shares of its Common Stock or any other equity or equity
               equivalent securities payable in shares of Common Stock, (B)
               subdivide outstanding shares of Common Stock into a larger number
               of shares, (C) combine (including by way of reverse stock split)
               outstanding shares of Common Stock into a smaller number of
               shares, or (D) issue by reclassification of shares of the Common
               Stock any shares of capital stock of the Company, then the Set
               Price shall be multiplied by a fraction of which the numerator
               shall be the number of shares of Common Stock (excluding treasury
               shares, if any) outstanding before such event and of which the
               denominator shall be the number of shares of Common Stock
               outstanding after such event. Any adjustment made pursuant to
               this Section shall become effective immediately after the record
               date for the determination of stockholders entitled to receive
               such dividend or distribution and shall become effective
               immediately after the effective date in the case of a
               subdivision, combination or re-classification.

                      (ii)   RIGHTS, OPTIONS, WARRANTS, ETC. If the Company, at
               any time while this Debenture is outstanding, shall issue rights,
               options or warrants to all holders of Common Stock (and not to
               holders of the Debentures) entitling them to subscribe for or
               purchase shares of Common Stock at a price per share less than
               the Set Price (the "Lower Price"), then the Set Price shall be
               multiplied by a fraction, of which the

                                       12
<PAGE>

               denominator shall be the number of shares of the Common Stock
               (excluding treasury shares, if any) outstanding on the date of
               issuance of such rights or warrants plus the number of additional
               shares of Common Stock offered for subscription or purchase, and
               of which the numerator shall be the number of shares of the
               Common Stock (excluding treasury shares, if any) outstanding on
               the date of issuance of such rights or warrants plus the number
               of shares which the aggregate offering price of the total number
               of shares so offered would purchase at the Set Price. Such
               adjustment shall be made whenever such rights or warrants are
               issued, and shall become effective immediately after the record
               date for the determination of stockholders entitled to receive
               such rights, options or warrants. However, upon the expiration of
               any such right, option or warrant to purchase shares of the
               Common Stock the issuance of which resulted in an adjustment in
               the Set Price pursuant to this Section, if any such right, option
               or warrant shall expire and shall not have been exercised, the
               Set Price shall immediately upon such expiration be recomputed
               and effective immediately upon such expiration be increased to
               the price which it would have been (but reflecting any other
               adjustments in the Set Price made pursuant to the provisions of
               this Section after the issuance of such rights or warrants) had
               the adjustment of the Set Price made upon the issuance of such
               rights, options or warrants been made on the basis of offering
               for subscription or purchase only that number of shares of the
               Common Stock actually purchased upon the exercise of such rights,
               options or warrants actually exercised.

                      (iii)  NO ADJUSTMENT. No adjustment to the Set Price
               pursuant to this Section will be made: (A) upon the exercise of
               any warrants, options, convertible securities or other rights
               issued and outstanding as of the original issuance date of this
               Debenture in accordance with the terms of such securities as of
               such date; (B) upon issuance, grant or exercise of shares,
               warrants, options or convertible securities to employees,
               officers, consultants or directors of the Company in accordance
               with plans approved by the Board of Directors; (C) upon the
               issuance of shares or other securities of the Company pursuant to
               an agreement or other written obligation entered into prior to
               the initial issuance of this Debenture; (D) upon the issuance of
               shares of Common Stock upon conversion of this or similar
               Debentures and exercise of Warrants being issued in connection
               with the issuance of this and similar Debentures; and (E) any
               securities issued in any bona fide firmly underwritten public
               offering, which shall not include equity lines of credit or
               similar transactions.

                      (iv)   RIGHTS OF SHAREHOLDERS, ETC. If the Company, at any
               time while this Debenture is outstanding, shall distribute to all
               holders of Common Stock (and not to Holders) evidences of its
               indebtedness or assets or rights or warrants to subscribe for or
               purchase any security, then in each such case the Set Price at
               which this Debenture shall thereafter be convertible shall be
               determined by multiplying the Set Price in effect immediately
               prior to the record date fixed for determination of stockholders
               entitled to receive such distribution by a fraction of which the
               denominator shall be the VWAP determined as of the record date
               mentioned above,

                                       13
<PAGE>

               and of which the numerator shall be such VWAP on such record date
               less the then fair market value at such record date of the
               portion of such assets or evidence of indebtedness so distributed
               applicable to one outstanding share of the Common Stock as
               determined by the Board of Directors in good faith. In either
               case the adjustments shall be described in a statement provided
               to the Holder of the portion of assets or evidences of
               indebtedness so distributed or such subscription rights
               applicable to one share of Common Stock. Such adjustment shall be
               made whenever any such distribution is made and shall become
               effective immediately after the record date mentioned above.

               (f)    Miscellaneous.

                      (i)    All calculations under this Section 4 shall be made
               to the nearest cent or the nearest 1/100th of a share, as the
               case may be. No adjustments in the Set Price shall be required if
               such adjustment is less than $0.01, provided, however, that any
               adjustments which by reason of this Section are not required to
               be made shall be carried forward and taken into account in any
               subsequent adjustment.

                      (ii)   Whenever the Set Price is adjusted hereunder, the
               Company shall promptly mail to each Holder a notice setting forth
               the Set Price after such adjustment and setting forth a brief
               statement of the facts requiring such adjustment.

                      (iii)  The Company covenants that it will at all times
               reserve and keep available out of its authorized and unissued
               shares of Common Stock solely for the purpose of issuance upon
               conversion of this Debenture and payment of interest on this
               Debenture, each as herein provided, free from preemptive rights
               or any other actual contingent purchase rights of persons other
               than the Holder, not less than such number of shares of the
               Common Stock as shall (subject to any additional requirements of
               the Company as to reservation of such shares set forth in the
               Purchase Agreement) be issuable (taking into account the
               adjustments and restrictions of Section 4) upon the conversion of
               the outstanding principal amount of this Debenture and payment of
               interest hereunder. The Company covenants that all shares of
               Common Stock that shall be so issuable shall, upon issue, be duly
               and validly authorized, issued, fully paid and nonassessable.

                      (iv)   Upon a conversion hereunder, the Company shall not
               be required to issue stock certificates representing fractions of
               shares of the Common Stock, but may if otherwise permitted, make
               a cash payment in respect of any final fraction of a share based
               on the VWAP on the date immediately prior the date such payment
               is due. If the Company elects not, or is unable, to make such a
               cash payment, the Holder shall be entitled to receive, in lieu of
               the final fraction of a share, one whole share of Common Stock.

                                       14
<PAGE>

                      (v)    The issuance of certificates for shares of the
               Common Stock on conversion of this Debenture shall be made
               without charge to the Holder for any documentary stamp or similar
               taxes that may be payable in respect of the issue or delivery of
               such certificate, provided that the Company shall not be required
               to pay any tax that may be payable in respect of any transfer
               involved in the issuance and delivery of any such certificate
               upon conversion in a name other than that of the Holder and the
               Company shall not be required to issue or deliver such
               certificates unless or until the person or persons requesting the
               issuance thereof shall have paid to the Company the amount of
               such tax or shall have established to the satisfaction of the
               Company that such tax has been paid.

        Section 5. Redemption.

               (a)    Optional Redemption by the Company. Upon the public
        announcement of the pendency of a Change in Control Transaction as
        defined in Section 16(c)(iii) and (iv) only, the Company shall have the
        right, upon at least 10 Trading Days' notice to the Holder (an "Optional
        Redemption Notice" and the date such notice is received by the Holder,
        the "Notice Date"), on the close of such Change of Control transaction,
        to redeem for cash no less than the entire outstanding principal amount
        of this Debenture at such closing, at a price equal to 110% of the
        outstanding principal amount of this Debenture (the "Optional Redemption
        Price") plus any accrued but unpaid interest hereon; provided, however,
        if at anytime during the period beginning on the Notice Date and ending
        on the date the Optional Redemption Price is paid in full, (i) the
        Registration Statement is not effective, or (ii) the Common Stock is not
        listed for trading on a Principal Market, then the Holder may elect to
        receive, as to the Sold Portion (as defined below), in lieu of the
        Optional Redemption Price, an amount in cash equal to the product of the
        Sold Shares (as defined below) and the highest VWAP during the period
        commencing on the Notice Date and ending on the Trading Day prior to the
        date such payment is made. The principal amount of this Debenture
        subject to the Optional Redemption Price shall then be reduced by the
        Sold Portion. The "Sold Shares" shall be the number of shares of Common
        Stock purchased by the Holder (in an open market transaction or
        otherwise) and delivered in satisfaction of a sale(s) of Common Stock by
        such Holder, made pursuant to the terms of this Agreement, such sale(s)
        occurring prior to the date of such public announcement. The "Sold
        Portion" shall be equal to the product of the Sold Shares and the Set
        Price. Nothing in this Section 5(a) shall be deemed to restrict or
        otherwise limit the Holder's right to convert any portion of the
        outstanding principal amount of the Debenture at any time pursuant to
        Section 4(a)(i), whether or not such principal amount is subject to an
        Optional Redemption Notice.

               (b)    Mandatory Redemption. On each Mandatory Redemption Date,
        the Company shall redeem the Holder's pro-rata share (based on the
        Investors' initial purchases of the Convertible Subordinated Debentures
        pursuant to the Purchase Agreement, adjusted upward in the event any
        Convertible Subordinated Debentures are no longer outstanding) of the
        Mandatory Redemption Amount. As to any Mandatory Redemption, in lieu of
        a cash redemption payment, the Company may elect to pay 100% of a
        Mandatory Redemption in

                                       15
<PAGE>

        Conversion Shares based on a conversion price equal to the lesser of (i)
        90% of the Adjusted VWAP during the 22 Trading Days immediately prior to
        the applicable Mandatory Redemption Date, and (ii) the Set Price (the
        "Mandatory Conversion Price"); provided, however, that the Mandatory
        Redemption shall only occur if, on the Mandatory Redemption Date and
        during the 30 calendar days prior thereto, (i) there is an effective
        Registration Statement pursuant to which the prospectus thereunder is
        available to resell all of the Conversion Shares issued to the Holder
        and all of the Conversion Shares as are issuable to the Holder upon
        conversion in full of this Debenture in respect of such Mandatory
        Redemption (and the Company believes, in good faith, that such
        effectiveness will continue uninterrupted for the foreseeable future),
        (ii) the Common Stock is listed for trading on a Principal Market (and
        the Company believes, in good faith, that trading of the Common Stock on
        the Principal Market will continue uninterrupted for the foreseeable
        future), and (iii) on or prior 25 calendar days prior to such Mandatory
        Redemption Date, the Company irrevocably notifies the Holder that it
        will issue Conversion Shares in lieu of cash and the Company includes in
        such notification the amount to be converted. In the event the Company
        elects to redeem this Debenture by the issuance of Conversion Shares,
        the Holder shall have the right, in its sole discretion, by notice to
        the Company on or prior to the applicable Mandatory Redemption Date, to
        decrease the amount to be converted at such time to anywhere between $0
        and the Mandatory Redemption Amount. In the event the Mandatory
        Redemption Amount is reduced by the Holder, such amount not converted
        but subject to the Mandatory Redemption, if not for the preceding
        sentence, shall be deferred to the end of this redemption schedule and
        cumulated with any other amounts so deferred. The Maturity Date and the
        Mandatory Redemption schedule shall be extended at the rate of one (1)
        month for each cumulated deferral payment equal to the Holder's Pro-rata
        share (based on the Investors' initial purchases of the Convertible
        Subordinated Debentures pursuant to the Purchase Agreement, adjusted
        upward in the event any Convertible Subordinated Debentures are no
        longer outstanding) of $500,000 (or such lesser amount if all
        outstanding principal amounts of the Convertible Subordinated Debentures
        are being redeemed hereunder for such Payment Period). The Mandatory
        Conversion Price for any deferred Mandatory Redemption Amounts, provided
        at such later time the Company elects to pay in Conversion Shares rather
        than cash in accordance with the terms herein, shall be calculated at
        the date when actually converted, not at the time of deferral. By way of
        example, assume that the Original Issue Date is January 1, 2002, the
        Effective Date is March 5, 2002 and $4,000,000 in principal is
        outstanding on this Debenture. Assume further that on June 1, 2002 the
        Company provides the Holder notice that it will redeem the Mandatory
        Redemption Amount (assume $300,000) of this Debenture by the issuance of
        Conversion Shares rather than cash. During the entire month of June and
        on July 1, 2002, the Registration Statement is maintained effective as
        to the Conversion Shares and the Common Stock trades uninterrupted on
        the Principal Market. Finally, assume that on June 30, 2002 the Holder
        notifies the Company that it elects to reduce the amount to be converted
        to $200,000. Under these circumstances, on July 1, 2002, the Company
        shall redeem $100,000 principal amount of this Debenture, which amount
        shall be paid by the issuance of Conversion Shares based on the
        Mandatory Conversion Price on the Mandatory Redemption Date. The
        Mandatory Redemption of $200,000 principal amount of this Debenture
        shall be deferred until after the

                                       16
<PAGE>

        remaining principal amount outstanding of this Debenture has been
        subject to this Mandatory Redemption provision. Except as otherwise set
        forth under this Section 5(b), as to any conversions hereunder, the
        Mandatory Redemption Date shall be deemed the Conversion Date and such
        conversions shall be made as if pursuant to Section 4(a)(ii) and the
        other sub-sections relating thereto, including but not limited to,
        liquidated damages and fees for late delivery of Conversion Shares. The
        Holder may convert any portion of the outstanding principal amount of
        the Debentures subject to a Mandatory Redemption prior to the date that
        the Mandatory Redemption is due and paid in full pursuant to Section
        4(a)(i). Nothing herein shall preclude the Holder from converting this
        Debenture to the extent this Debenture remains unpaid and unconverted
        after the Mandatory Redemption Date.

               (c)    Redemption Procedure. The Optional Redemption Price is due
        on the 10th Trading Day following the applicable Notice Date and payment
        of cash and/or issuance of Conversion Shares pursuant to the Mandatory
        Redemption shall be made on the Mandatory Redemption Date. If any
        portion of the Optional Redemption Price or cash payment for the
        Mandatory Redemption shall not be paid by the Company by expiration of
        such 10th Trading Day or the Mandatory Redemption Date, as the case may
        be, interest shall accrue thereon at the rate of 12% per annum (or the
        maximum rate permitted by applicable law, whichever is less) until the
        Optional Redemption Price or cash payment of the Mandatory Redemption
        plus all such interest is paid in full. In addition, if any portion of
        the Optional Redemption Price or payment for the Mandatory Redemption
        remains unpaid after such date, the Holders subject to such redemption
        may elect, by written notice to the Company given at any time
        thereafter, to invalidate ab initio such redemption, notwithstanding
        anything herein contained to the contrary. As to an Optional Redemption
        Notice, if the Company fails to make the redemption payment in a timely
        manner, it shall lose its right to deliver an Optional Redemption Notice
        to the Holder in the future. If a Holder elects to invalidate such
        redemption the Company shall promptly, and, in any event, not later than
        3 Trading Days from receipt of such Holder's notice of such election,
        return to such Holder all of the Debentures for which the Optional
        Redemption Price shall not have been paid in full.

        Section 6. Dividends, Mergers, Consolidations, Reclassifications, Etc.

               (a)    Notice of Certain Events. If (i) the Company shall declare
        a dividend (or any other distribution) on the Common Stock; (ii) the
        Company shall declare a special nonrecurring cash dividend on or a
        redemption of the Common Stock; (iii) the Company shall authorize the
        granting to all holders of the Common Stock rights or warrants to
        subscribe for or purchase any shares of capital stock of any class or of
        any rights; (iv) the approval of any stockholders of the Company shall
        be required in connection with any reclassification of the Common Stock,
        any consolidation or merger to which the Company is a party, any sale or
        transfer of all or substantially all of the assets of the Company, or
        any compulsory share exchange whereby the Common Stock is converted into
        other securities, cash or property; or (v) the Company shall authorize
        the voluntary or involuntary dissolution, liquidation or winding up of
        the affairs of the Company; then, in each case, the Company

                                       17
<PAGE>

        shall cause to be filed at each office or agency maintained for the
        purpose of conversion of the Debentures, and shall cause to be mailed to
        the Holder at their last addresses as they shall appear upon the stock
        books of the Company, at least 20 calendar days prior to the applicable
        record or effective date hereinafter specified, a notice stating (i) the
        date on which a record is to be taken for the purpose of such dividend,
        distribution, redemption, rights or warrants, or if a record is not to
        be taken, the date as of which the holders of the Common Stock of record
        to be entitled to such dividend, distributions, redemption, rights or
        warrants are to be determined, or (ii) the date on which such
        reclassification, consolidation, merger, sale, transfer or share
        exchange is expected to become effective or close, and the date as of
        which it is expected that holders of the Common Stock of record shall be
        entitled to exchange their shares of the Common Stock for securities,
        cash or other property deliverable upon such reclassification,
        consolidation, merger, sale, transfer or share exchange, provided, that
        the failure to mail such notice or any defect therein or in the mailing
        thereof shall not affect the validity of the corporate action required
        to be specified in such notice. The Holder is entitled to convert this
        Debenture during the 20-day period commencing the date of such notice to
        the effective date of the event triggering such notice.

               (b)    Change of Control. In case of any Change of Control for
        which the Company does not elect to exercise its optional right of
        redemption pursuant to Section 5(a), the Holder shall have the right to
        either (i) declare an Event of Default, (ii) convert its aggregate
        principal amount of Debentures then outstanding into the shares of stock
        and other securities, cash and property receivable upon or deemed to be
        held by holders of Common Stock following such merger, consolidation or
        sale, and such Holder shall be entitled upon such event or series of
        related events to receive such amount of securities, cash and property
        as the shares of Common Stock into which such aggregate principal amount
        of Debentures could have been converted immediately prior to such
        merger, consolidation or sale would have been entitled, or (iii) in the
        case of Change of Control involving a merger in which the Company is not
        the surviving corporation or a consolidation, (A) require the surviving
        entity to issue convertible subordinated debentures in such face amount
        equal to the aggregate principal amount of Debentures then held by the
        Holder, plus all accrued and unpaid interest and other amounts owing
        thereon, which newly issued debentures shall have terms identical
        (including with respect to conversion) to the terms of this Debenture
        and shall be entitled to all of the rights and privileges of a Holder of
        this Debenture and the agreements pursuant to which this Debenture was
        issued (including, without limitation, as such rights relate to the
        acquisition, transferability, registration and listing of such shares of
        stock or other securities issuable upon conversion thereof) provided
        that if such surviving entity is not a public company, such securities
        shall not be required to include a grant of registration rights to the
        Holder, and (B) simultaneously with the issuance of such convertible
        subordinated debentures, shall have the right to convert such instrument
        only into shares of stock and other securities, cash and property
        receivable upon or deemed to be held by holders of Common Stock
        following such merger or consolidation. In the case of clause (iii), the
        conversion price applicable for the newly issued convertible
        subordinated debentures shall be based upon the amount of securities,
        cash and property that each share of Common Stock would receive in such
        transaction and the Set Price in effect immediately prior to the
        effectiveness

                                       18
<PAGE>

        or closing date for such transaction. The terms of any such merger, sale
        or consolidation shall include such terms so as to continue to give the
        Holders the right to receive the securities, cash and property set forth
        in this Section upon any conversion or redemption following such event.
        This provision shall similarly apply to such successive events. The
        terms of any agreement to be executed in connection with any Change of
        Control transaction shall include terms requiring any successor or
        surviving entity to comply with the provisions of this Section.

               (c)    Reclassification. In case of any reclassification of the
        Common Stock (other than a change in par value or a change from par
        value to no par value) or any compulsory share exchange pursuant to
        which the Common Stock is converted into other securities, cash or
        property, the Holder shall have the right thereafter, at its option, (i)
        to convert, at any time, in whole or in part, the then outstanding
        principal amount, together with all accrued but unpaid interest and any
        other amounts then owing hereunder in respect of this Debenture only
        into the shares of stock and other securities, cash and property
        receivable upon or deemed to be held by holders of the Common Stock
        following such reclassification or share exchange, and the Holder of
        this Debenture shall be entitled upon such event to receive such amount
        of securities, cash or property as the shares of the Common Stock of the
        Company into which the then outstanding principal amount, together with
        all accrued but unpaid interest and any other amounts then owing
        hereunder in respect of this Debenture could have been converted
        immediately prior to such reclassification or share exchange would have
        been entitled, or (ii) to cause the Company to exercise its right to
        redeem the aggregate outstanding principal amount of this Debenture,
        plus all interest and other amounts due and payable thereon, pursuant to
        Section 5. The entire redemption price due hereunder shall be paid in
        cash. This provision shall similarly apply to successive
        reclassifications or share exchanges.

        Section 7. Notices. Any and all notices or other communications or
deliveries to be provided by the Holders hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by facsimile, sent by a nationally recognized overnight courier service or sent
by certified or registered mail, postage prepaid, addressed to the Company, as
set forth in the Purchase Agreement, or such other address or facsimile number
as the Company may specify for such purposes by notice to the Holders delivered
in accordance with this Section. Any and all notices or other communications or
deliveries to be provided by the Company hereunder shall be in writing and
delivered personally, by facsimile, sent by a nationally recognized overnight
courier service or sent by certified or registered mail, postage prepaid,
addressed to each Holder at the facsimile telephone number or address of such
Holder appearing on the books of the Company, or if no such facsimile telephone
number or address appears, at the principal place of business of the Holder. Any
notice or other communication or deliveries hereunder shall be deemed given and
effective on the earliest of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section prior to 4:30 p.m. (New York City time), (ii) the date
after the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section later than
4:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York
City time) on such

                                       19
<PAGE>

date, (iii) the Trading Day following the date of mailing, if sent by nationally
recognized overnight courier service, or (iv) upon actual receipt by the party
to whom such notice is required to be given.

        Section 8. Company's Obligations. Except as expressly provided herein,
no provision of this Debenture shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of, interest
and liquidated damages (if any) on, this Debenture at the time, place, and rate,
and in the coin or currency, herein prescribed. This Debenture is a direct
obligation of the Company. This Debenture ranks pari passu with all other
Debentures now or hereafter issued under the terms set forth herein. As long as
this Debenture is outstanding, the Company shall not and shall cause it
subsidiaries not to, without the consent of the Holder, (i) amend its
certificate of incorporation, bylaws or other charter documents so as to
adversely affect any rights of the Holder of this Debenture; (ii) repay,
repurchase or offer to repay, repurchase or otherwise acquire shares of its
Common Stock or other equity securities other than as to the Conversion Shares
to the extent permitted or required under the Purchase Agreement or this
Debenture, except for the repurchase of shares of Common Stock pursuant to an
employee stock incentive or stock purchase plan; or (iii) enter into any
agreement with respect to any of the foregoing. The Company may only voluntarily
prepay the outstanding principal amount of this Debenture in accordance with
Section 5(a) hereof or on the Maturity Date.

        Section 9. Rights as Holder. This Debenture shall not entitle the Holder
to any of the rights of a stockholder of the Company, including without
limitation, the right to vote, to receive dividends and other distributions, or
to receive any notice of, or to attend, meetings of stockholders or any other
proceedings of the Company, unless and to the extent converted into shares of
Common Stock in accordance with the terms hereof.

        Section 10. Replacement Debentures. If this Debenture shall be
mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in
exchange and substitution for and upon cancellation of a mutilated Debenture, or
in lieu of or in substitution for a lost, stolen or destroyed debenture, a new
Debenture for the principal amount of this Debenture so mutilated, lost, stolen
or destroyed but only upon receipt of evidence of such loss, theft or
destruction of such Debenture, and of the ownership hereof, and indemnity, if
requested, all reasonably satisfactory to the Company.

        Section 11. Governing Law. This Debenture shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to conflicts of laws thereof. The Company and the Holder hereby
irrevocably submit to the jurisdiction of the state and federal courts sitting
in the City of New York, Borough of Manhattan, for the adjudication of any
dispute hereunder or in connection herewith or with any transaction contemplated
hereby or discussed herein, and hereby irrevocably waives, and agrees not to
assert in any suit, action or proceeding, any claim that it is not personally
subject to the jurisdiction of any such court, or that such suit, action or
proceeding is improper. Each of the Company and the Holder hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by receiving a copy thereof sent to the Company
or Holder, as applicable, at the address in effect for notices to it under this
Debenture and agrees that such service shall constitute good and sufficient

                                       20
<PAGE>

service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.

        Section 12. Waivers. Any waiver by the Company or the Holder of a breach
of any provision of this Debenture shall not operate as or be construed to be a
waiver of any other breach of such provision or of any breach of any other
provision of this Debenture. The failure of the Company or the Holder to insist
upon strict adherence to any term of this Debenture on one or more occasions
shall not be considered a waiver or deprive that party of the right thereafter
to insist upon strict adherence to that term or any other term of this
Debenture. Any waiver must be in writing.

        Section 13. Severability. If any provision of this Debenture is held to
be invalid, illegal or unenforceable, by a court of competent jurisdiction, the
balance of this Debenture shall remain in effect, and if any provision is
inapplicable to any person or circumstance, it shall nevertheless remain
applicable to all other persons and circumstances. If it shall be found that any
interest or other amount deemed interest due hereunder shall violate applicable
laws governing usury, the applicable rate of interest due hereunder shall
automatically be lowered to equal the maximum permitted rate of interest. The
Company covenants (to the extent that it may lawfully do so) that it shall not
at any time insist upon, plead, or in any manner whatsoever claim or take the
benefit or advantage of, any stay, extension or usury law or other law which
would prohibit or forgive the Company from paying all or any portion of the
principal of or interest on the Debentures as contemplated herein, wherever
enacted, now or at any time hereafter in force, or which may affect the
covenants or the performance of this indenture, and the Company (to the extent
it may lawfully do so) hereby expressly waives all benefits or advantage of any
such law, and covenants that it will not, by resort to any such law, hinder,
delay or impede the execution of any power herein granted to the Holder.

        Section 14. Non Trading Days. Whenever any payment or other obligation
hereunder shall be due on a day other than a Trading Day, such payment shall be
made on the next succeeding Trading Day.

        Section 15. Headings. The headings used in this Debenture are used for
convenience only and are not to be considered in construing or interpreting this
Debenture.

        Section 16. Definitions. For the purposes hereof, the following terms
shall have the following meanings:

               (a)    "Adjusted VWAP" with respect to a period means the result
        obtained by selecting the 5 lowest VWAPs during such period.

               (b)    "Buy In" shall have the meaning assigned to such term in
        Section 4(c)(iv).

               (c)    "Change of Control Transaction" means the occurrence of
        any of (i) an acquisition after the date hereof by an individual or
        legal entity or "group" (as described in Rule 13d-5(b)(1) promulgated
        under the Exchange Act) of effective control (whether through

                                       21
<PAGE>

        legal or beneficial ownership of capital stock of the Company, by
        contract or otherwise) of in excess of 40% of the voting securities of
        the Company in a transaction or series of transactions not approved by
        the board of directors of the Company, (ii) a replacement at one time or
        over time of more than one-half of the members of the Company's board of
        directors which is not approved by a majority of those individuals who
        are members of the board of directors on the date hereof (or by those
        individuals who are serving as members of the board of directors on any
        date whose nomination to the board of directors was approved by a
        majority of the members of the board of directors who are members on the
        date hereof), (iii) the consolidation or merger of the Company with or
        into another entity (other than a merger or consolidation of a
        subsidiary of the Company into the Company or the Company into a
        wholly-owned subsidiary of the Company) where (A) the shareholders of
        the Company immediately prior to such transaction do not collectively
        own at least 51% of the outstanding voting securities of the surviving
        corporation of such consolidation or merger immediately following such
        transaction or (B) the common stock of such surviving corporation is not
        listed for trading on a Principal Market immediately after the
        completion of such transaction, (iv) the sale of all or substantially
        all of the assets of the Company in one or a series of related
        transactions, or (v) the execution by the Company of an agreement to
        which the Company is a party or by which it is bound, providing for any
        of the events set forth above in (i), (ii), (iii) or (iv).

               (d)    "Conversion Dates" means the Optional Conversion Dates and
        the Mandatory Redemption Dates.

               (e)    "Conversion Notice" shall have the meaning ascribed to
        such term in Section 4(c).

               (f)    "Conversion Shares" means the shares of Common Stock
        issuable upon conversion of Debentures or as payment of interest in
        accordance with the terms hereof.

               (g)    "Debenture(s)" shall have the meanings ascribed to such
        terms in the opening paragraph of this Debenture.

               (h)    "Debenture Register" shall have the meaning ascribed to
        such term in the second opening paragraph of this Debenture.

               (i)    "Event of Default" shall have the meaning ascribed to such
        term in Section 3(a).

               (j)    "Holder" shall have the meaning ascribed to such term in
        the second opening paragraph of this Debenture.

               (k)    "Mandatory Conversion Notice" shall have the meaning
        ascribed to such term in Section 4(a)(2).

                                       22
<PAGE>

               (l)    "Mandatory Conversion Price" shall have the meaning
        ascribed to such term in Section 5(b).

               (m)    "Mandatory Default Amount" for this Debenture shall equal
        the sum of (i) the greater of (A) 150% of the principal amount of this
        Debenture outstanding, plus all accrued and unpaid interest thereon, and
        (B) the principal amount of this Debenture to be prepaid, plus all
        accrued and unpaid interest thereon, divided by the then applicable
        conversion price on the date of acceleration multiplied by the VWAP on
        (x) the date the Mandatory Redemption Amount is demanded or otherwise
        due or (y) the date immediately prior to the date the Mandatory
        Redemption Amount is paid in full, whichever is greater, and (ii) all
        other amounts, costs, expenses and liquidated damages due in respect of
        this Debenture. Notwithstanding anything to the contrary in the
        preceding sentence, the Mandatory Default Amount pursuant solely to
        Section 3(a)(xi) shall be equal to 110% of the principal amount of this
        Debenture outstanding, plus all accrued and unpaid interest thereon.

               (n)    "Mandatory Payment" shall have the meaning ascribed to
        such term in Section 4(b).

               (l)    "Mandatory Redemption" shall have the meaning ascribed to
        such term in Section 5(b).

               (m)    "Mandatory Redemption Date" shall have the meaning
        ascribed to such term in Section 5(b).

               (m)    "Maturity Date" shall have the meaning ascribed to such
        term in the second opening paragraph of this Debenture.

               (n)    "Maximum Aggregate Share Amount" shall have the meaning
        ascribed to such term in Section 4(d)(ii).

               (o)    "Notice Date" shall have the meaning ascribed to such term
        in Section 5(a).

               (p)    "Optional Conversion Date" shall have the meaning ascribed
        to such term in Section 4(a)(i).

               (q)    "Optional Redemption Notice" shall have the meaning
        ascribed to such term in Section 5(a).

               (r)    "Optional Redemption Price" shall have the meaning
        ascribed to such term in Section 5(a).

               (s)    "Original Issue Date" shall mean the date of the first
        issuance of the Debentures regardless of the number of transfers of any
        Debenture and regardless of the number of instruments which may be
        issued to evidence such Debenture.

                                       23
<PAGE>

               (t)    "Person" means a corporation, an association, a
        partnership, organization, a business, an individual, a government or
        political subdivision thereof or a governmental agency.

               (u)    "Purchase Agreement" shall have the meaning ascribed to
        such term in the first paragraph of this Debenture.

               (v)    "Set Price" shall have the meaning ascribed to such term
        in Section 4(a)(i).

                       ***********************************

                                       24
<PAGE>

               IN WITNESS WHEREOF, the Company has caused this Debenture to be
duly executed by a duly authorized officer as of the date first above indicated.

                                        ACRES GAMING INCORPORATED

                                        By:_____________________________________
                                           Name:
                                           Title:

                                       25
<PAGE>

                                    EXHIBIT A

                              NOTICE OF CONVERSION

(To be Executed by the Registered Holder
in order to Convert the Debenture)

The undersigned hereby elects to convert its 6% Convertible Subordinated
Debenture into shares of common stock, $.01 par value per share (the "Common
Stock"), of Acres Gaming Incorporated (the "Company") according to the
conditions hereof, as of the date written below. If shares are to be issued in
the name of a person other than undersigned, the undersigned will pay all
transfer taxes payable with respect thereto and is delivering herewith such
certificates and opinions as reasonably requested by the Company in accordance
therewith. No fee will be charged to the holder for any conversion, except for
such transfer taxes, if any.

Conversion calculations:          ______________________________________________
                                  Date to Effect Conversion

                                  ______________________________________________
                                  Principal Amount of Debentures to be Converted

                                  ______________________________________________
                                  Number of shares of Common Stock to be Issued

                                  ______________________________________________
                                  Conversion Price

                                  ______________________________________________
                                  Signature

                                  ______________________________________________
                                  Name

                                  ______________________________________________
                                  Address

                                       26

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