First, never, ever, ever delete anything from
pg_xlog, ever. You will corrupt your database. Now, on to what you've misunderstood about all this:
I have checked multiple times by dropping tables and trying to restore the database to an earlier state. Is there anything that I am missing?
PITR doesn't work like that. It doesn't revert a running database to an older point in time.
How it works is that you set it up first, before you need to restore:
Set up WAL archiving, so you record WAL to a safe location.
Before you need to revert, you make a base backup. You can use
pg_start_backup() and rsync for this, but it's easiest and safest to use
pg_basebackup(). See the documentation for details on creating base backups. You must do this after setting up WAL archiving, so the archive contains all WAL from the moment the basebackup is taken onward.
Continue to run with WAL archiving, periodically taking a new base backup to reduce the amount of old WAL you have to keep and the amount of recovery time you need. Automated tools like pgbarman help with this.
When you need to create a historical copy of the database state to recover from something, you:
Make a copy of the base backup to writeable storage
Set the copy up with a
recovery.conf file that specifies an appropriate
restore_command for fetching WAL and the
recovery_target_time you want to replay up to. Setting
primary_conninfo makes no sense, since you won't be using this as a warm or hot standby streaming replica.
Start the copy, and allow it to replay WAL until it reports that recovery is complete.
Connect to the copy, and do whatever you need to grab the data you wish to recover out of it. You may use
pg_dump to extract a database or parts of it, use
COPY to extract contents of tables, etc.
If you wish to completely revert a database you can delete the datadir, replace it with the copy, and follow the procedure above to replay the copy up to a point in time.
What you cannot do is take an existing database and roll it back to some point in the past. WAL replay only goes forward in time. So you must restore an old base backup then allow it to replay WAL up to the point in time you want.