Yots,

you can obviously do pair kerning in TypeTool 3. Also, you can draw your pair and triplet ligature glyphs in TypeTool 3, and use Microsoft VOLT or Adobe FDK for OpenType (both free) to add OpenType Layout feature definition code that takes care of ligature substitution in OpenType-savvy applications.

Adam

I know that you can do kerning pairs in TT but what I'm asking is if I can create a font that is smart enough to know when to use certain characters.

For example, the typeface I'm creating has two different versions of "A" and three versions of Y. I've attached a JPG of the typeface so you can reference it.

Now, lets say I'm type the word WAYS, I want it to be able to recognize that combo of characters and use the correct A and Y so that they seem to "fit" together. I also want it to use different versions of the letters depending on which character procedes it or follows it.

Is this possible?

Very cool!
Yes. It's possible using conditional substitutions. You are going to have to work out the tables very well to anticipate all the possible combinations. You can download VOLT from Microsoft's site. The FDK has a higher learning curve. Look around on Microsoft's typography site. You'll find a lot of information.