Since there is no way to explain this with screenshots, let me go step by step here
1 - Tap the top right tile on your WP7 device that reads 'People'
2 - Now on the bottom right part of the screen, you will see three dots ... that you should tap next.
3 - This will pop a strip at the bottom that has 'Settings'. Now select this
4 - Here you have an option to 'Import SIM Contacts'. Tap this option. This will complete the import all the contacts from your SIM card
That's it!