Yes, you can. I don't remember the exact steps I went through (check out the Android forums on xda-developers.com), but they involved gaining "root" (i.e., administrative) access. Once that was done, I was able to boot up the phone and connect to my WiFi hotspot to active the G1.
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Yes. But you can't readily activate the phone with a prepaid SIM since it doesn't have a data plan. At least not without some hacking.