I installed the i2c then lm_sensors according to instructions, there were no errors and everything seemed to go smooth. However during start up I am getting an error:

Executing /etc/rc.d/init.d/lm_sensors start ..
Starting up sensors: starting module __i2c-i801__
starting module __eeprom__
/usr/local/bin/sensors: error while loading shared libraries: libsensors.so.2: cannot open shared object file: No such file or directory
[FAILED]

The libsensors.so.2 is located in /usr/local/bin/ so it should be no problem. I did everything according to the instructions and I am running out of ideas as to how to fix it.

Your libsensors.so.2 should reside in /usr/local/lib, so that's why it can not find it. The script "make install" should have automagically put it in /usr/local/lib and ran ldconfig to "register" it.

Move it to /usr/local/lib and run ldconfig afterwards, then your problem you disappear.