First off, your header image needs to be 980px wide and about 220px high. Those are both maximums, but to make it look right with the theme you need to stick pretty close to those numbers. Create the header image and then go to media > add new in the dashboard, upload the image, and when it finishes and before closing the window, copy the image URL out of the "file URL field at the bottom of that screen.
Go to appearance > edit CSS, clear everything from the CSS edit window, make sure that "add to existing..." is selected and paste in the following:
h1 {
color: transparent;
}
#container h1 {
background: transparent url(PUT_HEADER_IMAGE_URL_HERE) no-repeat scroll center
}
Replace the " PUT_HEADER_IMAGE_URL_HERE " between the parentheses with the full header image URL that you copied out when you uploaded the image. Click the "preview" button to see what it is going to look like and if you are happy with it, click the "save" button.