An approach to produce in situ fibrillated polytetrafluoroethylene (PTFE) in thermoplastic polyurethane (TPU) has been developed and the effect on the rheological behavior, mechanical properties, and microcellular foamability of TPU/PTFE composites has been studied. A drastic transformation of oval or rounded PTFE particles into highly stretched, sub-micron fibrils in the TPU matrix via melt compounding was revealed by scanning electron microscopy (SEM) images. Dynamic mechanical analysis (DMA) and tensile tests showed substantial improvements in the measured properties of the TPU/PTFE composites. The oscillatory shear behavior of the TPU/PTFE composites in the linear viscoelastic region was studied. Dynamic frequency sweep experiments revealed that the storage modulus (G′) increased and the slope of G′ vs. frequency decreased at low frequencies compared to neat TPU. This indicated that the entangled fibril structure responded elastically. Microcellular injection foaming (MIF) trials, SEM, and micro-computed tomography (Micro-CT) confirmed that the presence of PTFE fibrils dramatically improved the foamed structure, resulting in a two-order-increase in pore density (cell density) in comparison with neat TPU. Moreover, the fibrillar PTFE dramatically enhanced the hydrophobicity and decreased the coefficient of friction of the TPU/PTFE composites.