We consider the stability of clouds surrounded by a hotter confining medium with respect to which they are in motion, against Kelvin-Helmholtz instabilities (KHIs). In the presence of cooling, sound waves are damped by dissipation. Whenever cooling times are shorter than sound crossing times, as they are in the normal interstellar medium, this implies that the instability generated at the interface of the two media cannot propagate far from the interface itself. To study how this influences the overall stability, first we derive an analytic dispersion relation for cooling media, separated by a shear layer. The inclusion of dissipation does not heal the instability, but it is shown that only a small volume around the interface is affected, the perturbation decaying exponentially with distance from the surface; this is confirmed by numerical simulations. Numerical simulations of spherical clouds moving in a surrounding intercloud medium by which they are pressure con fined show that these clouds develop a core/halo structure, with a turbulent halo, and a core in laminar flow nearly unscathed by the KHIs. The related and previously reported ''champagne effect,'' whereby clouds seem to explode from their top sides, is cured by the inclusion of radiative losses.