Based on their API reference [amazon.com] 3rd-party apps that do whatever you want on the client side certainly look doable enough.
The downside is that it doesn't appear to support block-level file changes -- you can only create or overwrite an entire file at once. This means that storing something like a 50GB TrueCrypt volume isn't really feasible and you'd have to encrypt all your files individually. This is more difficult and more prone to mistakes.
Hopefully they expand the API at some point to allow binary delta updates of some kind, but their omission could have been a conscious decision to try and discourage people from storing huge files and big encrypted containers.