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Armstrong, a cancer survivor who will chase a fifth consecutive Tour de France victory in July, beat two-time winner Tiger Woods, last year's winner Michael Schumacher, Brazilian soccer player Ronaldo and Norway's record-breaking biathlete Ole Einar Bjoerndalen.
It was the second award that Armstrong received from the Laureus Sports Academy after he was honoured with the Comeback of the Year award in 2000. Armstrong underwent successful treatment for testicular cancer in 1998.
He celebrated the honour with his wife Kristin, marking one of the first times the couple have been seen together publicly following their reconciliation after a brief separation.
Armstrong accepted his award from Spain's Miguel Indurain, a five-time Tour winner whose mark he will attempt to equal in July, amongst a thunderous standing ovation.
"I really don't know if I deserve this award but I will accept it with pride," said Armstrong. "With the company I was with this evening it is both an honour and humbling."
Williams had a sparkling 2002, winning the French, Wimbledon and US Opens before completing what she dubbed the 'Serena Slam' with the Australian Open title in January.
Swedish golfer Annika Sorenstam, who will play the PGA's Colonial tournament this week, Britain's marathon world record holder Paula Radcliffe, American sprinter Marion Jones and Croatian skier Janica Kostelic were the other finalists.
Williams award capped off a glittering evening that had attracted royalty as well as movie stars, entertainers and a worldwide television audience estimated at 320
Brazilian Double
While Ronaldo missed out on the Sportsman of the Year, his performances in Brazil's successful World Cup campaign 2002 earned him the Comeback of the Year award. He also accepted the Team of the Year award on behalf of the Brazil World Cup team.
Battered by serious knee injuries, the Real Madrid striker played just six minutes of competitive soccer between October 1998 and November 21, 1999, leaving his career cloaked in doubt.
But he rebounded in spectacular fashion in 2002, scoring both goals in Brazil's 2-0 win over Germany in the World Cup final.
The Academy's 41 member panel chose Ronaldo above Austrian skier Hermann Maier, tennis player Pete Sampras and German swimmer Franziska Van Almsick.
Chinese basketball player Yao Ming grabbed Newcomer of the Year honours over British soccer player Wayne Rooney, Dutch speedskater Jochem Uytdehaage and tennis players Daniela Hantuchova of Slovakia and Argentine David Nalbandian.
Australian skier Michael Milton won the World Sportsman of the Year with a Disability while American speed climber Dean Potter won the World Alternative Sportsperson of the Year.
Golfer Gary Player, the winner of nine majors, won the Laureus Lifetime Achievement Award while Austrian actor Arnold Schwarzenegger received the Laureus Sport for Good Award.
