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Disclosure: I was able to solve this one only because the answer I would have marked was already marked by you and was wronged by GMATPREP!!
SOL: Statements 1 & 2 are true.
St3: LHS = a + b - ab + c - ac - bc + abc
For RHS, the trick is to refrain from applying our age-old maths rule of 'brackets take precedence over everything else'.......we do not know for sure what's the precedence of this operator that the question has defined. Thus we need to stick to the definition given in the question and expand RHS as follows: RHS = a + (b o c) - a(b o c) = a + b + c - bc - ab - ac + abc
Thus we observe that LHS = RHS!
ANS: E
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