I don't have my PE700 any more, but I remember the same issue. The dealer told me that it was a number of designs limit, not a size limit. However, if you had several designs that were huge, they may not fit either.
One thing about seeing that there is 'plenty' of space remaining is that some of that remaining space may well be 'phantom.' By that, I mean that some space us needed for 'ram' or other technical reason.
I was sure that I could get a dozen designs, not too large, on my disk. I do remember deleting and adding designs all the time. That is mostly the reason that I upgraded. I love to embroider, not to mess with cards. I upgraded to a USB drive capable machine, and now I have an old PC dedicated to my embroidery, and hooked directly to my machine.
Try to remember that at one time, you could only use minimal features. Just like the rest of the world, embroidery is advancing rapidly.
Another hint, if you are considering upgrading, all the dealers are really silent about pricing. It is a technique they use to get as much for a machine as they possibly can. One dealer will offer something for $1,000 while the exact same item will be $1,500 at the next dealer.
If you don't shop around, and spend time with the dealer, you will not find the best deal. Embroidery machines make a dazzling demonstration. They want you to salivate and take out your check book right then and there. Try not to do that.
The Computerist / Pat, The Avid Embroiderer