Still testing it, but have had it fully submerged in water for 6 (edit: over 14) hours now with it playing music. Every so often, I pulled it out of the water to skip songs and press/move buttons and switches.
All I did was use a syringe to inject dielectric silicon grease into the shuffle through its headphone jack. Being sure to really pack it in to fill all the void. That was it. Real easy and seems to be working. Do not use anything that hardens....like epoxies. This would probably ruin the controls as once it hardens, you pretty much locked the controls.
If this is mostly all the companies do that sell these ipods, well...its like robbery. The skill to do, time spent and material cost is no where near the justifacation for the charge, other than wanting to make 500% profit (just guessing). If they dont open up the casing, there is not much more they can do than what i am discribing here. As far as warranty to replace if it breaks, well at the prices they charge, you can buy three iPod shuffles or more...so whatever.
Will continue testing it in water to see if it fails. Will begin lap swimming with it once I get my Pyle headphones. Will update this post once I have more than 100 hours of it in the water, statically testing. As well as a few sessions of lap swimming in a pool.
I also have ideas to do this better. Make a cut out with a rubber mate just big enough to clear the clip on the back, but still covers the gap that the ipod shuffle's cover has. This is so when you inject the grease, it doesnt seep out the gaps around the cover as much. Maybe inject a little bit of acrylic conformal coating in first. With it face side down/clip side up (PCB is on the clip side and I think the opening is mostly right there) move it around to hopefully spread the conformal coating over mostly the PCB. Repeat this with the clip side down. Have a syringe and the dielectric grease ready to go as you want to be done injecting the grease as well before the conformal coating sets. Probably have @5 minutes. Be sure to clean out the headphone jack of the conformal coating as it is an insulator. Don't need to worry about the dielectric grease other than for aesthetic reasons. In fact, I'd leave the dielectric grease packed in the headphone jack and even repack every so often. Also, don't think it is necessary since the waterproofing is done from the inside out with the grease, but maybe apply a nice coat of conformal coating (it's pretty much a rubber seal) around the gap of the iPod shuffles back cover plate.
UPDATE: I statically tested it in a glass of water for over 70 hours, done doing that. Have maybe 6 hours of swimming laps with it. Pretty sure whether the companies do it like this or better, this way works too. Will only update again if it fails prematurely as a result of water.
You want to listen to an Ipod while swimming? There's a waterproof bluetooth headset call Wavetooth. You could use it with a bluetooth-capable IPod or Iphone. The latter could either stay dry on land, or else you could put it into a completely sealed bag.
What makes a shuffle difficult is that you couldn't seal the headphone to it, since then you could not charge it. Perhaps if you had a sealed bag that the headphone cable passed through in a watertight way, it might work.