(My question has been asked here before but with no working answers that I can see. E.g. Xcode4 Workspace with Static library project & application project)
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Check out my answer here and see if it helps you:
Linking a static library to an iOS project in XCode 4
These are based on my instructions for my own library. I think the missing step in your original process is that you don't add the static library to your app project as a target dependency (step 3 in my instructions) at the same time that you link it in "Link Binary with Libraries". You also might need to do step #5 depending on how the headers are linked by the static library project.
When I do this process with my own apps that have cross-project references to static library projects, it actually has one step less than the equivalent process in Xcode 3.