The Network Link Conditioner preference pane (installed from the "Hardware IO Tools for Xcode - Late July 2012" DMG on the Apple developer site) doesn't appear to have any effect when turned on. The original author of this question reported the symptoms on Mountain Lion. A later editor experienced the same symptoms and lack of expected network behavior change on Lion, with Xcode 4.5.1 installed.
When enabled, /var/log/system.log shows:
Jan 17 17:36:14 matt-mmf-macbook [0x0-0x1d01d].com.apple.systempreferences[371]: System Preferences(371,0x10fac7000) malloc: *** auto malloc[371]: error: GC operation on unregistered thread. Thread registered implicitly. Break on auto_zone_thread_registration_error() to debug.
Jan 17 17:36:18 matt-mmf-macbook System Preferences[371]: process command (simulate) failed
Jan 17 17:36:18 matt-mmf-macbook [0x0-0x1d01d].com.apple.systempreferences[371]: _nlc_start_simulation: (os/kern) failure
Jan 17 17:36:18 matt-mmf-macbook System Preferences[371]: Starting Network Link Conditioner
And the network connections do not exhibit the behavior specified by the selected profile.
Has anyone successfully gotten it to work, or figured out what the error in system.log might mean? As of 2013-01-17, the "accepted/correct" answer does not work for everyone experiencing the symptoms.