One of the possible phases of a sheared system of inelastically colliding rigid smooth disks is one in which relatively dense strips aligned at 45° to the streamwise direction are interspersed among similarly aligned dilute strips. The dense strips may have secondary microstructures in the form of elongated clusters. The latter are formed by an instability, following which they are convected, stretched, and rotated by the shear field. This process causes cluster–cluster collisions, a result of which is the partial destruction of the colliding clusters, followed by the emergence of new clusters. In addition, it is demonstrated that clustering dynamics can be responsible for hysteresis and multistability in granular systems. The studies presented in this paper involve molecular dynamics simulations complemented by theoretical analysis. ©1997 American Institute of Physics.