Apps are stored internally and do not have anything to do with storage provided by the sd card. You are limited to 512MB of space for apps, texts, pictures, video, etc. The sd card storage space can be used to hold pictures, movies, songs.
To free up space, you can do a couple things. First, you can open the File Viewer on your phone and move any photos, movies or songs you've created/downloaded from internal to the sd card. Second, you can delete apps or text messages to free up space.
You have plenty of memory for media and such on your SD. The problem is that your apps will only download to your phone's hard drive. Delete some apps that are unused or not needed, and you should be fine.
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