Since I've never seen a good explanation before I'll copy this from the sign:
"The fascinating structures that cover the sandstone are called tafoni, which is Italian for cavern. Geologists first used the word tafoni to describe sandstone formations found on the island of Corsica, and the term "alveolar weathering" to describe the process that created these formations. This complex weathering process that creates the caves, columns and sandy surfaces that are smooth in some areas and covered with labyrinths of knobs and ridges in others, takes place over thousands of years. This is how it works: During the rainy season, water soaks deep into the sandstone and mixes with the calcium that is there. As the water evaporates from the stone during the dry summer season, some of the dissolved calcium is drawn out to the surface of the stone where it forms a hard outer layer called the duricrust. This evaporation process causes any calcium remaining in the interior of the stone to be distributed unevenly so that there are some soft, low-calcium areas and some hard, high-calcium areas. If the outer surface of the sandstone is cracked or broken, the softer parts of the interior erode away more quickly than the harder areas, forming caves, caverns and tafoni formations.
'Tree trunk' and 'cannonball' formations, and delicate honeycomb structures known as 'fretwork' or 'stone lace', are all tafoni formations found at this site. These intricate patterns result from the different erosion rates of the harder and softer regions within the sandstone. The harder regions with more calcium stay cemented together, while the softer regions with less calcium erode away. The 'tree trunks', 'cannonballs', and knobs and ridges in the fretwork are regions in the sandstone that have more calcium and resist erosion."
Update: There's more good information about tafoni at www.tafoni.com/
Photo taken by Dawn Endico on the Tafoni Trail at El Corte de Madera Creek Open Space Preserve, January 8, 2006.