An adaptive image restoration algorithm based on 2-D bilateral filtering has been proposed to enhance the signal-to-noise ratio (SNR) of the intrusion location for phase-sensitive optical time domain reflectometry (Ф-OTDR) system. By converting the spatial and time information of the Ф-OTDR traces into 2-D image, the proposed 2-D bilateral filtering algorithm can smooth the noise and preserve the useful signal efficiently. To simplify the algorithm, a Lorentz spatial function is adopted to replace the original Gaussian function, which has higher practicability. Furthermore, an adaptive parameter setting method is developed according to the relation between the optimal gray level standard deviation and noise standard deviation, which is much faster and more robust for different types of signals. In the experiment, the SNR of location information has been improved over 14 dB without spatial resolution loss for a signal with original SNR of 6.43 dB in 27.6 km sensing fiber. The proposed method has the potential to precisely extract intrusion location from a harsh environment with strong background noise.