Windows Live Toolbar 3.0 and Google Toolbar 4 have been released recently. They both have a feature called Custom Button, which allows new buttons to be added via XML. So I took them for test spins.
First, Windows Live Toolbar. I found MSDN Custom Button SDK through Windows Live Gallery. Usually I'm not a big fan of MSDN as most documentations are not easy to follow, and Custom Button SDK doc was no exception. I found it more helpful to refer to the MSDN button, which was installed in \Documents and Settings\\Application Data\Microsoft\WLTB Custom Buttons. Here is the XML source code for Keiji Notepad button, and this is how the button looks like:

Next, Google Toolbar. I found the API Documentation from Button Gallery. Though the documentation was easy to understand, I was disappointed with the limitted functionality. First, Google Toolbar only support displaying one RSS feed, as opposed to up to 10 in Windows Live Toolbar. Also, it was not possible to add custom menu items. Here's the XML source code, and here's the screenshot:

Though Custom Buttons are obviously not as powerful as other forms of adding functionality, it certainly offers great simplicity. For those interested in installing Keiji Notepad buttons, here are the links:
Keiji Notepad (Windows Live Toolbar)
Keiji Notepad (Google Toolbar)