Couple things:
Do you not control this setup? If not, why aren't you asking the person controlling it what the issue is? For all you know, that third machine could be a zombie box downloading massive amounts of pr0n on your connection.
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The prob now is the internet connection never had come close the 1mbps speed.
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Have you had Broadband internet before? 1 MBps is quoted speed under very specific conditions, and you will never-ever reach that, I promise you. Mine is 6 MBps, and I don't even come close.
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and my mozilla browser frequently shows "the connection has been reset" sign, and needs to be reloaded a few times before it actually connects to a site albeit slowly.
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Do you have a proxy server? Is this wireless or wired? If it's wireless or you have a proxy, this is either a weak router / distance issue, or a proxy configuration issue.
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Downloads are crap slow, never ever reached more than 100kbps.
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You could have a 15TBps connection and still get 100 KBps downloads. Keep in mind that a download is affected not only by your available bandwidth but also the bandwidth of the host. If the site you're connecting to is on 56K or even 1MBps cable, they won't be able to push it fast enough for you to get it.
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And one more thing, for some unknown reasons, the local area connection status window indicates my internet speed to be 100mbps, which is very unlikely.
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This is true. Ethernet runs at 10/100/1000 MBps in a LAN configuration. That means that in IDEAL conditions, the cable is rated to handle 100 MBps of transfer between computers in your LAN (Local Area Network), not to the Internet. You probably won't hit this either, as it's the theoretical maximum of the cable, in ideal conditions (distance, STP, etc.)
Lastly, as posters above have mentioned, make sure you are comparing apples-to-apples.
1 bit = 0 or 1.
1 Byte = 8 bits (e.g. 10101010)
Thereby,
1 KB = 1 kilobyte = 8,192 bits
1 Kb = 1 kilobit = 1,024 bits
The same thing happens with MB and Mb, so be careful when specifying. Common convention uses B for Byte and b for bit.