I've been meaning to post an update here for ages... I did a relatively simple waterproofing job on the shuffle about four months ago. I use it to go swimming five times a week. I swim 1,000 metres each time and use the shuffle every time, both in the shower before and after the swim and - most importantly - during the swim! It's submerged fully for probably 2/3 of the time that I'm swimming and has so far lasted through roughly 100 swims, 100 kilometres in water and is still going strong.
My simple method taken from here: injected with dielectric silicone grease through the headphone socket. I did this over a few days - I kept going back after a few hours and trying to force a bit more grease in to make sure all the air inside had been displaced. When grease started to ooze through the controls (which become rather stiff) I stopped.
I then sealed the seam on the back of the shuffle with a layer of epoxy. Initially I was a bit paranoid about the switches on the side leaking, and the seal on the front round the buttons and would cover them in grease before a swim and wipe off the excess. This became a pain in the ass, and as the shuffle exceeded my expectations and kept working, I stopped.
Now, I only "top up" the grease after I charge the shuffle, which is about once a week, or more if I'm adding / removing files. Sometimes I forget. It just keeps working! In fact... I waterproofed it in the first place because I thought I'd lost my expensively waterproofed WaterFi shuffle. The Waterfi turned up a week after I'd done my DIY job - and I'm still yet to use it again! My DIY one is actually more reliable - the buttons work better for a start. The WaterFi kept pausing over and over again - I assume because the button was permanently sticky.
Anyway - to anyone still looking for a cheap, small, waterproof mp3 player... and if you can still get hold of a shuffle - the grease cost five bucks.