The Sage has only been in play a couple of times in our games, but what we've done is he can only look at the top card of the board that he is in. So if he's in the Dungeon, he can only look at the Dungeon deck, not the actual Adventure deck. Is this the right way of handling the situation?

I found another discussion on this while looking for something else:

http://www.fantasyflightgames.com/edge_foros_discusion.asp?efid=49&efcid=1&efidt=356863

So we've been doing this legit?

Sounds very correct.

When Sage is in highlands or dungeon he can see the top card of that deck.

Yep

Yes that's correct