“I’m planning a vacation and will probably be doing lots of water related activities. I would like to waterproof my iPhone to protect it from water. Any recommendations for a good waterproof case for the iPhone that still allows good functionality?”
The best iPhone (4/4S models) waterproof case goes to LifeProof 
The case offers full waterproof protection (IP-68 standards) which allows you to use the iPhone underwater to take pictures/videos, go surfing, do some swimming and whatever you like to do in the water. The case will protect your iPhone to a depth of 2 meters (6.6 feet).
If you want to listen to music while in the water you’ll need a set of waterproof headphones and the LifeProof waterproof headphone adapter which is sold separately.
LifeProof Waterproof case for iPhone 4 and iPhone 4S
Check the iPhone waterproof case in action: