You need to take time to make sure the shifter is set all the way to the smallest cog and locked into place. Without the cable installed click through and verify that you have the number of indexed stops as you do gears; if you don't you've locked the shifter into the square peg and need to reorient the shifter to reach the correct number of indexed stops.

See this tech doc.
http://techdocs.shimano.com/media/te...9830605258.PDF

The projection needs to face downward (as per the tech doc). Set your derailleur onto the smallest cog, run a cable, take up the slack and adjust your derailleur with the barrel adjuster. Run through all your gears with all your cogs.

That should do it.