The first law of thermodynamics says energy cannot be created or destroyed. But we can collide photons to form electrons and positrons. Does this means that law does not apply in these microscopic scales?
And we can create mass from energy in the above process.but is it possible to make atoms that way? Like converting an electron to proton as a step in it? That would be like real energy- mass conversion.
Photons aren't pure energy - they are a particle like all other particles. Admittedly photons are massless but then so are gluons, and indeed above the electroweak phase transition temperature so are all particles.
So pair production from photons and annihilation into photons is just a scattering process like any other particle interaction.
However if is possible to convert kinetic energy to matter, and indeed particle colliders do this every day. This is how the Higgs boson was produced at the LHC. See the question What keeps mass from turning into energy? for more on this.
Energy conservation may be better stated as,
The total energy, i.e. energy in the form of mass + all other forms of energy is conserved for an isolated system.
This would mean that annihilation is simply an example of interconversion of energy from 'mass-energy' to 'light(electromagnetic) energy'.
