A submerged coral reef extends across much of Kailua Bay at a depth of around 20 ft (6 m). Live coral cover along this submerged reef is sparse, but the reef does exhibit a classic spur-and-groove formation, which generally consists of irregular limestone masses interrupted by grooves up to 10 ft (3 m) deep and filled with several feet of sand. Seaward of the reef margin, the gently sloping bottom is patchy with corals and algae. Two large sand deposits occur offshore, the larger one occupying a channel extending into deeper waters.

Kailua Beach, a 2 mi (1.2 km) stretch of sandy shore between Alâla Point (Lanikai Point) and Kapoho Point, backs Kailua Bay. Popoi'a (Flat) Island, just offshore of Kailua Beach, is a low, limestone reef remnant that has been uplifted relative to present-day sea level. It is separated from the northwest reef margin of the bay by a 10 ft (3 m) deep, sandy channel. Besides being a popular picnic, snorkeling, and surfing spot, Flat Island is a designated bird sanctuary.

Several freshwater sources discharge into Kailua Bay, including the Môkapu sewage outfall, storm drains, the Nu'upia Ponds seaward canal, Ka'elepulu Canal which drains Enchanted Lake, and Kawai Nui Canal. Significant volumes of fresh water are released from these sources during periods of heavy rains. Waters within 660 ft (about 200 m) of shore are commonly greenish in color, indicating an enrichment of algae (phytoplankton). Moderate enrichment of nutrients occurs in a small area over the sewage outfall.

Kailua Bay is a popular recreational area on Windward O`ahu. Its submerged coral reef and exposure to steady Northeast Tradewinds create ideal conditions that cause the bay to be considered as the island's windsurfing capital. Several consistent surf areas, known collectively as Kailua surf break, occur offshore. Boating, camping, sunbathing, swimming, fishing, snorkeling, and kayaking are also important activities in this area.