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Yes, but the intent of Kyte Phone is to make the phone simple.

If the kid can replace the default launcher, she does not need an special UI in the first place.

(If all you want to do is micromanage your kid's life through GPS monitoring, is it possible to install a hidden GPS tracker?)

If the permission system for apps is a whitelist of installed apps the parent has approved, then installing an app from the market wouldn't necessarily allow the newly installed app to run. The new app would just show up on the device-administration page for the parent to see and decide on.

Now, if the kid uses the market to uninstall the Kyte launcher itself... then I'm guessing the stock launcher or a pop-up asking what launcher to use would come up.

Kids don't have access to the Market and parents have to explicitly white-list an application, so there's not much danger there.