I did this with my old Droid. I just used the latest build of CM7 for it. You can use the power widget that is included with CM7 and select the Disable Mobile Data option. Some homescreen apps, like LauncherPro, can hide apps from the drawer, so you could hide Phone/Contacts/etc. This worked well for me.
Sorry getting back to this soo late....busy week of work.
My plan is to use this for my 4yr old as a teaching device. Reading/Writing/math with Time limits/etc...The idea would be that phone/gps would be permanently off, wifi enabled.
Looking into the Parental Control App too.
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