Well, two things come to mind based solely on what I can see in the pictures. number one, the derailer where it attaches to the extention arm appears to be attached wrong (too far forward), or two, the chain is too long. If that is the origional chain, I am going with mis-adjustment. Where the allen head bolt is, loosen that (with the chain off the front gear set), and rotate it toward the back of the bike until it is about 30 degrees to the frame. That should be close enough. I am mostly speculating on that, having not seen an extention piece before. Retighten. Put the chain back on, small gear up front, small gear (10) in the rear. The lever needs to be all the way forward, where most of the cable is in the sheath. Set the spring adjuster at the other end of the cable about in the middle of the threads. Pull the cable tight and tighten the nut anchoring the cable to the derailer. There should be two screws almost side by side on the derailer to adjust the derailer stops so that the chain does not fall off either end of the cassette when shifting to low gear or high gear. the little spring adjuster is to fine tune where the chain stops if you have index shifting on those shift levers. Now one thing... if the cable is a solid wire instead of the more normal multi strand wires, you can take most of what I said and throw it out the window. I have never had one of those types of derailers, and don't know a darned thing about them. I hope this helped. I know it confused the heck out of me!