As the mom of a timid pup (Woobie), my heart breaks for this little guy! But, I understand if people have children and the dog acts afraid, they could be worried about it developing into a fear biting situation. I hope the shelter can spend some time educating any would-be adopter about dealing with the shyness and maybe give the adopter some resources such as the Shyk9 group on Yahoo.
It is a challenge to live with. You feel very sorry for the dog and want to help and give it love and show it that it can trust people. But, when the honeymoon period wears off and it's still afraid (even of you) and you can't do regular dog stuff, it can get very discouraging. I'm committed to Woobs 100% but that doesn't mean that I don't still get frustrated and discouraged and even a little embarrassed when he's freaking out in public, trying to run for the hills and people think I've done something to him because he's trying to pull away from me and it's because there's a screeching child 3 football fields away! 
Don't blame the returners. It's better that he be returned and find just the right person who can help him than to be relegated to a back yard or live an unhappy life with people who don't understand his issues and can't work to help him through them. I'll say a little prayer to the shy dog gods that he finds just the right family.
"I wonder what goes through his mind when he sees us peeing in his water bowl"
Penny Ward Moser
Save a life, make a shelter pet part of your family.