To summarise:
Displacement works on imported objects. The renderer needs to have "ray trace objects" turned OFF. To avoid splitting edges, the object needs to have normals, the normals need to be smooth across the whole surface, and "use smooth normals" needs to be enabled on the object reader (which it is by default).
However, shadows (and self shadows) of these objects will not be displaced. Nor will reflections and GI contributions. That's because ray tracer can't displace imported objects, it can only displace built-in displaceable primitives such as the planet, plane etc. This limitation means that the lighting on the object might look strange if displacement is extreme, as the shadow it casts on itself is cast by the non-displaced surface.
We plan to make the ray tracer able to displace all objects in a future version. This will solve the shadow and reflection problem and will allow displacement while "ray trace object" is on.
Matt