The way the theme is built, "header" has a height of 55px and additional padding of 15px above and below, giving it a total height of 85px. The "navigation bar" is 35px high, so the "header container" is effectively 120px high (actually it is 122px if you include the 1px border).
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Replace these values with the height and padding that you want.
Note that there is a quirk in the implementation. Your header image is really a header background image, so it is defined in the "#header-container" as opposed to the "#header". As a result it will lie behind your navigation bar as well. I plan to add a feature that will let you define different images for the header and the header background.