Update: According to Notch's blog post about changes coming in 1.6, the torches-on-fast-leaves bug is getting fixed:
- Fixed buttons and levers being placeable on leaves in “fast graphics” mode
This means that monsters can no longer spawn on leaves, either, as they are always considered transparent, even when using Fast graphics.
Monsters can spawn on any solid, non-transparent block which is at light level 7 or lower.
Signs, torches, rails, and the like are ignored when spawning monsters; they'll spawn on the block underneath just fine. This is why one-block-wide railways need to be lit.
Transparency means whether or not light passes through a block rather than whether you can see through it. Half-blocks, doors, stairs, and glass all count as transparent and prevent monster spawning. Leaves, oddly, count as transparent only when Fancy graphics are enabled. An easy way to test a block for transparency is to try placing a torch or sign on it — neither can be placed on transparent blocks. (Meaning that torches can be placed on leaves with Fast graphics, but not with Fancy.)
Torches put out light level 14, so monsters can't spawn within 5 blocks of a torch orthogonally or 3 blocks diagonally. If you put your torches in a diamond pattern, they can be up to 9 blocks apart, but it's best to move them closer than that on uneven terrain. (I use 5 myself.)
If you like, you can actually torch your treetops by changing your graphics to Fast, placing the torches, and switching back. Your torches will stay rooted, even though you wouldn't normally be able to place them that way. Personally, I think it makes them look rather cheerful. :-)
Best Answer
I'm not sure why you decided to use a hoe and pour water. Trees don't need those conditions and... actually don't grow on farmland! Only plain dirt works.
[Prior to 1.7.2 the above behavior was considered a bug. As of 1.7.2, this behavior has been fixed. The bug database entry for this bug is here. The above behaviour was causing the problem. The discussion below causes (on average) more than one bonemeal to be consumed when growing oaks in this configuration.]
One more problem could be that there's not enough space. Other kinds of trees require a 5x5 space.
I just tried to grow an oak close to a wall. It succeeded, but required about 10 bonemeals, and that's probably not good.
One more thing. I would remove those torches on the walls. As they are "transparent" trees will replace them anyway. Torches near saplings should be enough.