A fast converging coding algorithm that adaptively selects the modes of macroblocks is introduced. For a given frame, the optimal modes are selected based on the decision curves that minimize the overall distortion at a given bit rate. The method proposed in this paper is different from the conventional ones in that it does not manipulate the quantizer to meet the target bit rate but it satisfies the target bit rate by finding optimal modes of macroblocks which result consistent visual quality. Lagrange multiplier of the unconstrained cost function is controlled to trigger decision curves to generate appropriate modes to meet bit rate and the curve is obtained by utilizing simulated annealing optimization technique. The algorithm is implemented within H.261 video codec and simulation results demonstrate superior visual quality.