Best thing is never to activate
I don't think that is an option, is it? Wouldn't you
get the "reduced functionality" problem for refusing
to activate?

The real problem here is what what happens if the
bad guys get into Microsoft's WGA servers and maliciously
attack large numbers of normal users by arbitrarily
refusing to validate them. As I understand it (I'm paranoid),
You don't just validate once, it's an ongoing process.
Your genuine system may fail validation at some future time,
due to a bug on their end.

Remember, you are only leasing the software, you do not
own your copy. You must continue to comply.