I've been wanting to develop a plugin for Illustrator that involves creating a tool (like the Pen Tool) with specific behaviors. I downloaded the IllustratorSDK and was working with that to make a plug-in, but then I read about Extension Builder for Flash Builder and was wondering weather it was possible to create such a tool using the Extension Builder.
So far all I have seen the Extension Builder do is create windows and tools that create or manipulate, but I haven't seen an example of it creating an actual tool (like the Pen Tool).
So can the Extension builder create a tool?
On a side note, what is the difference between an extension and a plug-in?.
This is currently not possible using Extension Builder, for your needs you are probably best to look at the native Illustrator SDK.
Extension Builder provides Creative Suite ActionScript Wrapper libraries (CSAWLibs), which allow you to interact with the scripting DOM of products like Illustrator from ActionScript.
I don't think it is possible to create tools with Illustrator scripting, and therefore not possible with CSAWLib. You might want to try raising the issue on the Illustrator scripting forums.
In response to your broader question, CS extensions are Flash-based panels that can run inside multiple Creative Suite point products (Photoshop, Illustrator, InDesign, etc.). Plug-ins built with traditional product SDKs are native components that run in one product, but allow for deeper integration within the product (such as, in this case, the ability to define tools).