This research aims to apply an output filtering method to conduct the system parameter identification of an unstable wheel-driven pendulum system. First, the nonlinear dynamic model of the system is established by utilizing the Lagrangian dynamic theorem. Next, the Least-Square (LS) is introduced for system parameter identification formulation. Nevertheless, considering the real scenario, the wheel displacement is acquired from encoders subject to quantization errors. The pitch angle of the pendulum cart is also accompanied by Gaussian noise. Therefore, using numerical differentiation for angular acceleration in the LS estimations directly would induce incorrect state information seriously. To address this practical issue, an output filtering method is considered. The developed parameter identification algorithm could attenuate the influence of the quantization effect as well as noisy data and thus obtain much more accurate parameter identification results. Comparative simulation reveals that the output filtering method has a superior parameter estimation performance than the direct numerical difference method.