I've tried changing the padding in the #nav div navbar and found that the right and left padding can be modified using the following declaration:

#nav ul li a{
padding: 0px 30px;
margin: 0px;
text-decoration: none;
font-weight: bold;
color: #FFFFFF;
}


The top and bottom padding, however, can only be modified in the higher level declaration:

#nav {
padding: 2px 0px;
margin: 0px;
background-image:url(images/navbar_fade2.JPG);
background-repeat:repeat-x;
font-size: 70%;
text-align: center;
color: #FFFFFF;
zoom:1;
}

Why can't I modify all four paddings in the first declaration?

http://www.diamondpackaging.com/green/diamond8c.htm
http://www.diamondpackaging.com/green/diamond8c.css

Not true. You're comparing apples and oranges here.
#nav refers to the DIV and applies padding to IT.

#nav ul li a - applies padding to the LINK that is inside the list item, inside the UL, which is inside the #nav div.

Adjusting padding on the LINK <a> inside the list item is done as padding: 2px 30px.

That's what I thought. But for some reason using the code below does not seem to do what I want it to do - that is create a little more breathing room around the links in the #nav. Rather, when using this method the #nav "compresses" and doesn't utilize the greater height (20px) of the navbar_fade2.JPG background image.

#nav {
padding: 0px;
margin: 0px;
background-image:url(images/navbar_fade2.JPG);
background-repeat:repeat-x;
font-size: 70%;
text-align: center;
color: #FFFFFF;
zoom:1;
}


#nav ul li a{
padding: 2px 30px;
margin: 0px;
text-decoration: none;
font-weight: bold;
color: #FFFFFF;
}

give #nav a height equal to the height of your bg image.

I gave that a try but it didn't seem to do the trick.

For some reason, adding top and bottom padding to the #nav div (and not #nav ul li a) seems to be the only way to get it to appear the way I want. It's ok that this workaround solves a problem but I get the feeling I'm missing something.

Thanks,
Wilbury