There is no way to bypass the touchscreen step of the setup process. I repair phones, including the T-Mobile G1. I can replace the screen for you if you would like for $60. Please email me at [email protected] for more information.
I don't think there's a way to bypass it, but it's not that hard to replace the touch screen, maybe there's even just a little corrosion on the connector.There's a T-Mobile G1 Repair Guide that shows you how to take it apart. If you don't want to do it yourself and a third party T-Mobile G1 Repair Service.
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