Windows system shows wrong amount of RAM

Enter the BIOS and go to Advanced Chipset Features → North Bridge Configuration, then change the setting Memory Remap Feature to [Enabled].

From the manual:

Memory Remap Feature

This item is used to enable/disable memory remap feature. Its mainly for if you have a 64bit OS and 4GB of RAM. Basically it allows you to remap the overlapped PCI memory above the total physical memory.

If that alone doesn't help, download the latest BIOS update from here and follow the steps outlined in the tutorial How to flash BIOS?.

As Ramhound has already said, the 2GB is a hardware limit of the N550 Atom processor: http://ark.intel.com/products/50154/Intel-Atom-Processor-N550-1M-Cache-1_50-GHz

The best you can do is get the fastest DDR3 which the system will support. I can't find anything specific about the fastest you can use in the Asus EEE PC 1015PEM but I did find a few laptops using DDR3 1066 ram.

Newegg's memory finder lists modules up to DDR3 1333 (http://www.newegg.com/MemoryFinder/#y8wBAbp0ad0ABD) for all the included Asus Eee PC 1015* notebook's (up to 1666 for a few of them) but there is no listing for the 1015PEM. Of course the price difference is minimal for trusted brands like Kingston and there is no downside to using RAM which is too fast for the system, it will simply run at a slower speed.

Of course, the real limit is the processor and the demands of Win7. Try disabling all Aero fetures and any other "eye-candy" if you haven't already. If you're adventurous you may see noticeable gains from using a lightweight linux distro.