The Attitude Heading Reference System (AHRS) has been widely used to provide the position and orientation of a rigid body. A low cost MEMS based inertial sensor measurement unit (IMU) is a core device in AHRS. To improve the AHRS system performance, there is a need to develop (i) stochastic IMU error models and (ii) random noise minimization techniques. In this paper, we modify the Sage-Husa Adaptive Kalman Filter (SHAKF) to incorporate time-varying noise estimator and robustifier, termed as Modified Sage-Husa Adaptive Robust Kalman Filter (MSHARKF). In the proposed algorithm, a three segment approach is used to evaluate the adaptive scale factor followed by the learning statistics. The scale factor is iteratively updated in the MSHARKF equations. In addition, angle random walk (ARW) and bias instability (BI) errors are represented by state-space models. The proposed algorithm is applied to restrain the drift error and random noise in the MEMS IMUs signals. The performance of this algorithm is analyzed using Allan variance (AV) analysis for static signals whereas the Root Mean Square Error (RMSE) values are evaluated for dynamic signals. Experimental results demonstrate the effectiveness of MSHARKF in reducing the drift and random noise in static and dynamic conditions as compared with other existing algorithms. Finally, we present sufficient conditions for convergence proof of the MSHARKF algorithm. © 2001-2012 IEEE.