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 enables the WDM EPON architecture to achieve wavelength spatial-reuse and to provide an intercommunication capability between ONUs. As a result, the architecture not only allows upstream access to the central office but also facilitates a truly-shared LAN capability amongst the end users. The proposed WDM EPON scheme is integrated with a DBA algorithm to arbitrate the access of each individual ONU over the WDM layer and is fully consistent with the requirement for backward compatibility with the 802.3ah MPCP standard. Keywords-EPON; AWG; MAC; Wavelength Spatial-Reuse