On 16 July 2007, Real Madrid signed Pepe from Porto. Pepe signed a five-year contract with the Spanish champions, for a fee of €30 million. On 8 November, he came to blows with teammate Javier Balboa during a training session. Pepe would be nonetheless called-up for Real Madrid's next match, whereas the winger was not. Pepe best performance of the season was in the 1-0 away win at the Camp Nou against FC Barcelona when he almost single-handedly stop all Barca's attacks. At the end of the match Spanish sports daily Diario AS gave Pepe a player rating of 4/4, while Goal.com have given him 9 stars out of 10.

Throughout the 2008-09 season, Pepe's season was marred by a red card against Getafe CF on 21 April 2009. With the score at 2-2 and with only a few minutes left to play, Javier Casquero went down in the penalty area. Pepe then proceeded to kick the fallen opponent twice: once on his shin and once on his lower back. Pepe was given a 10-game ban, which ruled him out of the remaining six fixtures of the season, including the home game against title rivals FC Barcelona on 2 May. Real Madrid president Vicente Boluda revealed shortly afterwards that the club would be appealing the decision, however failed.

During 2009-2010 season, he returned to claim his place back in the starting line-up and his first goal in La Liga for Los Merengues came against Sevilla FC on 4th October 2009 at Ramon Sanchez Pizjuan, a header from a Guti free-kick which tied the game at 1-1.