The nonlinear evolution of the electrostatic Kelvin-Helmholtz instability, resulting from velocity-sheared plasma flows perpendicular to an ambient magnetic field, has been studied including Pedersen conductivity effects (i.e., ion-neutral collisions). We find that the Kelvin-Helmholtz instability develops in a distinctly different manner in the nonlinear regime with Pedersen coupling than without it. Specifically, we show that Pedersen coupling effects, in conjunction with a neutral wind and density gradient, (1) result in an increased time scale for Kelvin-Helmholtz instability wave growth, (2) inhibit Kelvin-Helmholtz vortex formation, (3) lead to nonlinear structures which can be described as “breaking waves”, and (4) generate, in the nonlinear regime, small scale turbulence by means of secondary instabilities growing on the primary waves. We have also computed the spatial power spectra of the electrostatic potential and density fluctuations and find that there is a tendency for the potential and density spectra to become shallower when Pedersen conductivity effects are included. We compare our results with recent Dynamics Explorer satellite observations of velocity-sheared plasma flows in the high-latitude, near-Earth space plasma and find good agreement.