A rate controller for allocating a bit budget for video frames to be encoded is disclosed. The rate controller of the present invention considers many different factors when determining the frame bit budget including: desired video quality, target bit rate, frame type (intra-frame or inter-frame), frame duration, intra-frame frequency, frame complexity, intra-block frequency within an intra-frame, buffer overflow, buffer underflow, and the encoded video frame quality for a possible second pass.