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The circuit converts a 4-bit binary word to 4-bit Gray code. The most significant bit of a Gray code is the same as the most significant bit of the corresponding binary code. Thus, the most significant bit of the output is simply copied from input B3. For the other bits: Bit i of a Gray code is 1 if bits i and i + 1 of the corresponding binary code are not equal. This is implemented using XOR gates with adjacent bits of the binary code as inputs.