Another way of looking at this (besides CoM) which I enjoy is to analyze the forces individually. By Newton's second law, F=dp/dt. Also, according to his 3rd law, the force exerted by mass 1 on mass 2 is equal and opposite to that exerted by mass 2 on 1. Let's say we have a two-body system. The total momentum of the system is given by the sum of the individual momenta of each mass, so p=p1+p2. If we take the time derivative: dp/dt=dp1/dt+dp2/dt. BUT what are dp1/dt and dp2/dt? They're just the forces on masses 1 and 2, respectively! And these forces must be equal and opposite, so dp1/dt=-dp2/dt (if the masses interact only with each other during a collision, or whatever their interaction may be). Then, we have that dp/dt=0. Or, momentum is conserved. However, there was no statement whatsoever here concerning energy. It was all just forces and momentum, and like the people above have mentioned, only macroscopic kinetic energy is lost, not actual energy. Sorry for the extra post, I know you understand it now. Just wanted to give a slightly different perspective :).