diff --git a/packages/coding-agent/CHANGELOG.md b/packages/coding-agent/CHANGELOG.md
index 8f304397..25836f92 100644
--- a/packages/coding-agent/CHANGELOG.md
+++ b/packages/coding-agent/CHANGELOG.md
@@ -163,11 +163,14 @@ pi --extension ./safety.ts -e ./todo.ts
 **Runner and wrapper:**
 - `HookRunner` → `ExtensionRunner`
 - `wrapToolsWithHooks()` → `wrapToolsWithExtensions()`
-- `wrapToolWithHook()` → `wrapToolWithExtensions()`
+- `wrapToolWithHooks()` → `wrapToolWithExtensions()`
 
 **CreateAgentSessionOptions:**
-- `.hooks` → `.extensions`
-- `.customTools` → merged into `.extensions`
+- `.hooks` → removed (use `.additionalExtensionPaths` for paths)
+- `.additionalHookPaths` → `.additionalExtensionPaths`
+- `.preloadedHooks` → `.preloadedExtensions`
+- `.customTools` type changed: `Array<{ path?; tool: CustomTool }>` → `ToolDefinition[]`
+- `.additionalCustomToolPaths` → merged into `.additionalExtensionPaths`
 - `.slashCommands` → `.promptTemplates`
 
 **AgentSession:**
@@ -194,6 +197,8 @@ pi --extension ./safety.ts -e ./todo.ts
 - Documentation: `docs/hooks.md` and `docs/custom-tools.md` merged into `docs/extensions.md`
 - Examples: `examples/hooks/` and `examples/custom-tools/` merged into `examples/extensions/`
 - README: Extensions section expanded with custom tools, commands, events, state persistence, shortcuts, flags, and UI examples
+- SDK: `customTools` option now accepts `ToolDefinition[]` directly (simplified from `Array<{ path?, tool }>`)
+- SDK: `additionalExtensionPaths` replaces both `additionalHookPaths` and `additionalCustomToolPaths`
 
 ## [0.34.2] - 2026-01-04
 
diff --git a/packages/coding-agent/docs/extensions.md b/packages/coding-agent/docs/extensions.md
index 09a2219c..724e1896 100644
--- a/packages/coding-agent/docs/extensions.md
+++ b/packages/coding-agent/docs/extensions.md
@@ -811,8 +811,8 @@ pi.registerTool({
       details: { progress: 50 },
     });
 
-    // Run commands with cancellation support
-    const result = await ctx.exec("some-command", [], { signal });
+    // Run commands via pi.exec (captured from extension closure)
+    const result = await pi.exec("some-command", [], { signal });
 
     // Return result
     return {
@@ -941,9 +941,9 @@ ctx.ui.notify("Done!", "info");  // "info" | "warning" | "error"
 ctx.ui.setStatus("my-ext", "Processing...");
 ctx.ui.setStatus("my-ext", undefined);  // Clear
 
-// Widget above editor (string array or Component)
+// Widget above editor (string array or factory function)
 ctx.ui.setWidget("my-widget", ["Line 1", "Line 2"]);
-ctx.ui.setWidget("my-widget", new Text(theme.fg("accent", "Custom"), 0, 0));
+ctx.ui.setWidget("my-widget", (tui, theme) => new Text(theme.fg("accent", "Custom"), 0, 0));
 ctx.ui.setWidget("my-widget", undefined);  // Clear
 
 // Terminal title
diff --git a/packages/coding-agent/docs/sdk.md b/packages/coding-agent/docs/sdk.md
index a1d604f6..b946af55 100644
--- a/packages/coding-agent/docs/sdk.md
+++ b/packages/coding-agent/docs/sdk.md
@@ -440,125 +440,60 @@ const { session } = await createAgentSession({
 
 ```typescript
 import { Type } from "@sinclair/typebox";
-import { createAgentSession, discoverCustomTools, type CustomTool } from "@mariozechner/pi-coding-agent";
+import { createAgentSession, type ToolDefinition } from "@mariozechner/pi-coding-agent";
 
 // Inline custom tool
-const myTool: CustomTool = {
+const myTool: ToolDefinition = {
   name: "my_tool",
   label: "My Tool",
   description: "Does something useful",
   parameters: Type.Object({
     input: Type.String({ description: "Input value" }),
   }),
-  execute: async (toolCallId, params) => ({
+  execute: async (toolCallId, params, onUpdate, ctx, signal) => ({
     content: [{ type: "text", text: `Result: ${params.input}` }],
     details: {},
   }),
 };
 
-// Replace discovery with inline tools
+// Pass custom tools directly
 const { session } = await createAgentSession({
-  customTools: [{ tool: myTool }],
-});
-
-// Merge with discovered tools (share eventBus for tool.events communication)
-import { createEventBus } from "@mariozechner/pi-coding-agent";
-
-const eventBus = createEventBus();
-const discovered = await discoverCustomTools(eventBus);
-const { session } = await createAgentSession({
-  customTools: [...discovered, { tool: myTool }],
-  eventBus,
-});
-
-// Add paths without replacing discovery
-const { session } = await createAgentSession({
-  additionalCustomToolPaths: ["/extra/tools"],
+  customTools: [myTool],
 });
 ```
 
+Custom tools passed via `customTools` are combined with extension-registered tools. Extensions discovered from `~/.pi/agent/extensions/` and `.pi/extensions/` can also register tools via `pi.registerTool()`.
+
 > See [examples/sdk/05-tools.ts](../examples/sdk/05-tools.ts)
 
-### Hooks
+### Extensions
+
+Extensions are discovered from `~/.pi/agent/extensions/` and `.pi/extensions/`. Use `additionalExtensionPaths` to add extra paths:
 
 ```typescript
-import { createAgentSession, discoverHooks, type HookFactory } from "@mariozechner/pi-coding-agent";
+import { createAgentSession } from "@mariozechner/pi-coding-agent";
 
-// Inline hook
-const loggingHook: HookFactory = (api) => {
-  // Log tool calls
-  api.on("tool_call", async (event) => {
-    console.log(`Tool: ${event.toolName}`);
-    return undefined; // Don't block
-  });
-  
-  // Block dangerous commands
-  api.on("tool_call", async (event) => {
-    if (event.toolName === "bash" && event.input.command?.includes("rm -rf")) {
-      return { block: true, reason: "Dangerous command" };
-    }
-    return undefined;
-  });
-  
-  // Register custom prompt template
-  api.registerCommand("stats", {
-    description: "Show session stats",
-    handler: async (ctx) => {
-      const entries = ctx.sessionManager.getEntries();
-      ctx.ui.notify(`${entries.length} entries`, "info");
-    },
-  });
-  
-  // Inject messages
-  api.sendMessage({
-    customType: "my-hook",
-    content: "Hook initialized",
-    display: false,  // Hidden from TUI
-  }, false);  // Don't trigger agent turn
-  
-  // Persist hook state
-  api.appendEntry("my-hook", { initialized: true });
-};
-
-// Replace discovery
+// Add extension paths (merged with discovery)
 const { session } = await createAgentSession({
-  hooks: [{ factory: loggingHook }],
-});
-
-// Disable all hooks
-const { session } = await createAgentSession({
-  hooks: [],
-});
-
-// Merge with discovered (share eventBus for pi.events communication)
-import { createEventBus } from "@mariozechner/pi-coding-agent";
-
-const eventBus = createEventBus();
-const discovered = await discoverHooks(eventBus);
-const { session } = await createAgentSession({
-  hooks: [...discovered, { factory: loggingHook }],
-  eventBus,
-});
-
-// Add paths without replacing
-const { session } = await createAgentSession({
-  additionalHookPaths: ["/extra/hooks"],
+  additionalExtensionPaths: ["/path/to/my-extension.ts"],
 });
 ```
 
-**Event Bus:** If hooks or tools use `pi.events` for inter-component communication, pass the same `eventBus` to `discoverHooks()`, `discoverCustomTools()`, and `createAgentSession()`. Otherwise each gets an isolated bus and events won't be shared.
+Extensions can register tools, subscribe to events, add commands, and more. See [extensions.md](extensions.md) for the full API.
 
-Hook API methods:
-- `api.on(event, handler)` - Subscribe to lifecycle events
-- `api.events.emit(channel, data)` - Emit to shared event bus
-- `api.events.on(channel, handler)` - Listen on shared event bus
-- `api.sendMessage(message, triggerTurn?)` - Inject message (creates `CustomMessageEntry`)
-- `api.appendEntry(customType, data?)` - Persist hook state (not in LLM context)
-- `api.registerCommand(name, options)` - Register custom command
-- `api.registerMessageRenderer(customType, renderer)` - Custom TUI rendering
-- `api.exec(command, args, options?)` - Execute shell commands
+**Event Bus:** Extensions can communicate via `pi.events`. Pass a shared `eventBus` to `createAgentSession()` if you need to emit/listen from outside:
 
-> See [examples/sdk/06-hooks.ts](../examples/sdk/06-hooks.ts) and [docs/hooks.md](hooks.md)
+```typescript
+import { createAgentSession, createEventBus } from "@mariozechner/pi-coding-agent";
+
+const eventBus = createEventBus();
+const { session } = await createAgentSession({ eventBus });
+
+// Listen for events from extensions
+eventBus.on("my-extension:status", (data) => console.log(data));
+```
+
+> See [examples/sdk/06-extensions.ts](../examples/sdk/06-extensions.ts) and [docs/extensions.md](extensions.md)
 
 ### Skills
 
diff --git a/packages/coding-agent/src/core/sdk.ts b/packages/coding-agent/src/core/sdk.ts
index ffd0f7ab..af5dbb55 100644
--- a/packages/coding-agent/src/core/sdk.ts
+++ b/packages/coding-agent/src/core/sdk.ts
@@ -32,6 +32,7 @@ import {
 	ExtensionRunner,
 	type LoadExtensionsResult,
 	type LoadedExtension,
+	type ToolDefinition,
 	wrapRegisteredTools,
 	wrapToolsWithExtensions,
 } from "./extensions/index.js";
@@ -96,6 +97,8 @@ export interface CreateAgentSessionOptions {
 
 	/** Built-in tools to use. Default: codingTools [read, bash, edit, write] */
 	tools?: Tool[];
+	/** Custom tools to register (in addition to built-in tools). */
+	customTools?: ToolDefinition[];
 	/** Additional extension paths to load (merged with discovery). */
 	additionalExtensionPaths?: string[];
 	/** Pre-loaded extensions (skips loading, used when extensions were loaded early for CLI flags). */
@@ -130,7 +133,13 @@ export interface CreateAgentSessionResult {
 
 // Re-exports
 
-export type { ExtensionAPI, ExtensionCommandContext, ExtensionContext, ExtensionFactory } from "./extensions/index.js";
+export type {
+	ExtensionAPI,
+	ExtensionCommandContext,
+	ExtensionContext,
+	ExtensionFactory,
+	ToolDefinition,
+} from "./extensions/index.js";
 export type { PromptTemplate } from "./prompt-templates.js";
 export type { Settings, SkillsSettings } from "./settings-manager.js";
 export type { Skill } from "./skills.js";
@@ -444,11 +453,17 @@ export async function createAgentSession(options: CreateAgentSessionOptions = {}
 		extensionRunner = new ExtensionRunner(extensionsResult.extensions, cwd, sessionManager, modelRegistry);
 	}
 
-	// Wrap extension-registered tools with context getter (agent/session assigned below, accessed at execute time)
+	// Wrap extension-registered tools and SDK-provided custom tools with context getter
+	// (agent/session assigned below, accessed at execute time)
 	let agent: Agent;
 	let session: AgentSession;
 	const registeredTools = extensionRunner?.getAllRegisteredTools() ?? [];
-	const wrappedExtensionTools = wrapRegisteredTools(registeredTools, () => ({
+	// Combine extension-registered tools with SDK-provided custom tools
+	const allCustomTools = [
+		...registeredTools,
+		...(options.customTools?.map((def) => ({ definition: def, extensionPath: "<sdk>" })) ?? []),
+	];
+	const wrappedExtensionTools = wrapRegisteredTools(allCustomTools, () => ({
 		ui: extensionRunner?.getUIContext() ?? {
 			select: async () => undefined,
 			confirm: async () => false,