I have 3.6 GB of space available 9.8 GB Used. I have 25GB total Storage and 25GB Available. I need 4.1 to update to iIOS7. Why won't it let me?

25GB storage is probably your iCloud storage, not your local storage on your device. You say you only have 3.6GB of that space.

Update your phone with iTunes on your computer, and you won't need to hunt around for the necessary space. It'll also give you an opportunity to fully back up your phone before doing the upgrade.