I played this card sequence the following way, please let me know if I am correct:

Gibbering Soul says "Response: After Gibbering Soul is destroyed search your deck for a Shub card with a skull ... and put it into your hand"

Horrid Transformation says, "Action: Sacrifice one of your characters and search your deck for ... and put it into play"

First I played Gibbering Soul from my hand.

Then I played Horrid Transformation, and sacrificed Gibbering Soul. I figure that triggers the Response on Gibbering Soul as being destroyed, and I searched my deck for a card etc. Then, since I sacrificed, I completed Horrid Transformation's Action and searched for another card.

Is this correct? Also, can you sacrifice Characters that are still in your hand?

Thanks.

wrong.

sacrifice is not destroyed.

So g.soul + shocking transformation = you only search for a character from the transformation, and g.soul ability does not trigger. (that would have been to good, I guess).

The rule book clarifies that "sacrifice" and "destroy" are different concepts and have nothing to do with each other.