This paper aims to deal with the problem of rotor position estimation and compensation for a magnetically suspended flywheel energy storage system under the consideration of measurement noise and unknown disturbances. First, the flywheel system working principle and description are analyzed and, based on this, the mathematical model as well as the coordinates transformation are introduced. For the purpose of the state estimation, a two-step extended sliding-mode observer is considered to obtain the estimates of the rotor angular position. In this control strategy, a traditional sliding-mode observer is adopted as a first-step original state estimator. After that, the relationship between the angular position and the estimation error is established and a second-step observer is designed to obtain the estimation of the error. The estimated error is then used to compensate the real values of the rotor angular position generated by the first-step observer. To reject the influences of the measurement noise and unknown disturbances, the H∞ optimization strategy is considered to determine the second-step observer structure. Finally, experimental results are presented to demonstrate the effectiveness of the proposed method. It is demonstrated that the proposed two-step observer method has a better estimation accuracy and control performance.