Taiwan's vice-president, Annette Lu, shared a stage with the Dalai Lama and appealed for peace and understanding from Beijing.
About 30,000 people - Taiwanese citizens and Tibetans in exile - bought tickets to attend the event at the Linkou stadium in the capital, Taipei.
The Dalai Lama insists he is visiting the island only for religious reasons, although he will meet some government leaders.
But a BBC correspondent in Taipei says China, which has protested against the Dalai Lama's presence in Taiwan, will be further angered to see him greeted like a head of state.
Taiwan's vice-president, Annette Lu, shared a stage with the Dalai Lama and appealed for peace and understanding from Beijing.
Ms Lu, whom China has condemned for describing Taiwan and China as "close neighbours but distant relatives", thanked the Dalai Lama for braving China's disapproval and showing concern for Taiwan.
"Tibetan compatriots have faced all kinds of oppression from the Chinese Communist Party, but he still has the heart and compassion to come to Taiwan, because he knows we have many difficulties as well," she said.
"Don't forget, 90 nautical miles away on the coast of the Chinese mainland, 300 missiles have already been deployed, and 50 more will be added every year."
The Dalai Lama told the crowd that real happiness came from "a sense of satisfaction in the heart," not physical comfort.
He said there was a positive side to any bad experience. It was unfortunate that he had lost his homeland, he said, but that he gained the opportunity to meet many people and learn from them.
Chinese threats
The Dalai Lama fled Tibet after an abortive uprising against Chinese rule in 1959. He won the Nobel Peace Prize three decades later for a peaceful campaign for autonomy.
Beijing has also claimed sovereignty over Taiwan since routing nationalist troops in a civil war on the mainland in 1949. It has threatened to attack Taiwan if it declares independence or drags its feet on unification talks.
The Dalai Lama postponed his Taiwan visit for months to avoid provoking Beijing. He made the journey only when relations between Taiwan and China appeared more stable.
He plans to meet new Taiwanese President Chen Shui-bian and the island's former leader, Lee Teng-hui.