How are Sensors Interpreted by the Microcontroller?
I'm not familiar with the Arduino, but in general microcontrollers interface with a sensor in one of two ways -- either as a voltage (using the ADC for input) or via a serial bus such as I2C or SPI.

The LM35 outputs a voltage proportional to the temperature in degrees Centigrade, so you would interface its output to the ADC input of the Arduino.

The raw output of the LM35 is 10 mv/degree C, so 2 degrees C would be 20 mv, 100 degrees C would be 1 volt,  and room temperature (22 deg C) would be 0.22 volts.  Assuming a 10-bit ADC with a reference voltage of 3.3 volts, 0.22 v would be represented as 0.22/3.3*1024 or a count of 68.

Note that you are not using very much of the range of the ADC, even at 100 deg C.  You could increase the voltage of the LM35 by adding a rail-to-rail op-amp with a gain of 5 which would allow you to measure 0 to 65 deg C and use the full range of the ADC.  0 deg would still be 0, 65 deg C would be 0.65*5/3.3*1024 or a count of 1008, and 22 deg C would be 0.22*5/3.3*1024 or a count of 341.



In order to measure temperatures below 0 deg C with the LM35, it would be necessary to provide a negative bias to the output (see the LM35 datasheet for details).