Here is what I have done.
I have installed Xcode in /Developer, that seemed to be the default.
I have extractec Sparrow in /Developer/sparrow-1.2
I have set my SPARROW_SRC to /Developer/sparrow-1.2/sparrow/src and compiled the libSparrow.a from this directory.
When I open the demo app in /Developer/sparrow-1.2/samples/demo, the libSparrow.a is no longer labeled in "red" in the Sparrow sub-project. libSparrow.a seems to have been compiled correctly. Since the lib is in a sub-project, I don't know if I have to link it in another place.
Still the demo project won't compile. It will if I include all of the Sparrow source in it. At least I can move forward even though it defeats the purpose of using an external library!
Thanks for your help.