Identification correction - 02/01/2006 (thx to an anonymous viewer)
Probably "British Soldier" Lichen, Cladonia cristatella, only about ¼-inch high (6 mm). In this common lichen the red spore-producing reproductive structures are clearly visible. The lichen's name, Cladonia cristatella, is actually the name of the fungus. The alga species in the lichen is known as Trebouxia erici. However, it's customary to name a lichen after its fungal part, so the whole lichen is known as Cladonia cristatella. British Soldiers are usually found on decaying wood, soil, mossy logs, tree bases, and stumps. They help break down old wood and put nutrients back into the soil where they can be used by plants. Lichens also take nitrogen from the air and put it into the soil so plants can use it.

LICHEN STRUCTURE:
Structurally, lichens are among the most bizarre of all forms of life. That's because every lichen species is actually composed of two, possibly even three, other distinct species of organisms. One species is a kind of fungus, usually the other species is an alga, but sometimes it can be a photosynthesizing bacterium known as a cyanobacterium. Sometimes all three organisms are found in one lichen. Since fungi are not even considered to be plants, and algae and bacteria usually look nothing like lichens, what lichens do is almost like merging a shrub with a dog to produce something that looks and lives unlike either shrub or dog!

In this amazing association the fungus benefits from the algae because fungi, having no chlorophyll, can't photosynthesize their own food. A lichen's fungal part is thus "fed" by its photosynthesizing algal part. The algae benefit from the association because the fungus is better able to find, soak up, and retain water and nutrients than the algae. Also, the fungus gives the resulting lichen shape, and provides the reproductive structures. The main body of a lichen is called a thallus. This kind of relationship between two or more organisms, where both organisms benefit, is known as mutualism.

Lichens are very sensitive to air pollution, so if your town has dirty air your backyard may not have many lichens to study.

material ref. http://www.backyardnature.net/lichens.htm