Your observation that $C=180^\circ-(A+B)$ is a good one. Recall also the following trigonometric identities: $$\sin(x\pm y)=\sin x\cos y\pm\cos x\sin y$$ $$\cos(x\pm y)=\cos x\cos y\mp\sin x\sin y$$ By LHS, I'll denote the expression on the left-hand side of the desired identity; by RHS, the expression on the right-hand side.
Now, the RHS is messier, so we'll start there. Let's first apply your observation to $\sin(C/2)$, along with the angle difference and sum formulas for sine, and the angle sum formula for cosine, to see that
$\begin{eqnarray*}
\sin(C/2) & = & \sin\bigl(90^\circ-(A+B)/2\bigr)\\
& = & \sin 90^\circ\cos\bigl((A+B)/2\bigr)-\cos 90^\circ\sin\bigl((A+B)/2\bigr)\\
& = & \cos(A/2+B/2)\\
& = & \cos(A/2)\cos(B/2)-\sin(A/2)\sin(B/2),
\end{eqnarray*}$
since $\sin 90^\circ=1$ and $\cos 90^\circ=0$. Thus, we see that
$$\mathrm{RHS} = 1+4\sin(A/2)\cos(A/2)\sin(B/2)\cos(B/2)-4\sin^2(A/2)\sin^2(B/2)\tag{1}$$
Recall also the double angle formulas for sine (a special case of angle sum with $x=y$): $$\sin(2x)=2\sin x\cos x.$$
Also, the Pythogorean identity and the angle sum formula for cosine (with $x=y$) gives us the following double angle formula for cosine: $$\cos(2x)=\cos^2x-\sin^2x=1-2\sin^2x,$$ from which we derive the identity $$2\sin^2x=1-\cos(2x).$$ Applying this identity, along with the double angle and angle sum formulas for sine, to $(1)$ gives us
$\begin{eqnarray*}
\mathrm{RHS} & = & 1+\bigl(2\sin(A/2)\cos(A/2)\bigr)\bigl(2\sin(B/2)\cos(B/2)\bigr)-\bigl(2\sin^2(A/2)\bigr)(2\sin^2(B/2)\bigr)\\
& = & 1+\sin A\sin B-(1-\cos A)(1-\cos B)\\
& = & \cos A + \cos B - \cos A\cos B+\sin A\sin B\\
& = & \cos A + \cos B - \cos(A+B).
\end{eqnarray*}$
At this point, we can apply your observation again, along with the angle difference formula for cosine, to see that
$\begin{eqnarray*}
\mathrm{LHS} & = & \cos A + \cos B + \cos 180^\circ\cos(A+B)-\sin 180^\circ\sin(A+B)\\
& = & \cos A + \cos B - \cos(A+B),
\end{eqnarray*}$
since $\cos 180^\circ=-1$ and $\sin 180^\circ=0$. Thus, LHS = RHS, as desired.
trigonometry
andtrigonometric-identities
--there's a delete option. That said, you don't have to delete it. – Cameron Buie Jul 30 '12 at 17:11