This study proposes a novel WDM EPON system based upon an AWG, in which multiple wavelengths are established in both the upstream and the downstream fibers. The use of the AWG device enables the WDM EPON architecture to support wavelength spatial reuse and allows the ONUs to communicate directly with one another rather than through the OLT. The proposed WDM EPON scheme takes account of the requirement for backward compatibility with the 802.3ah MPCP and investigates the associated DBA algorithm used to arbitrate the access of each individual ONU over the WDM layer.