You need to log on to the server as the application identity and run the install or repair as the application identity. Is this what you did?
Also, if you restored from backup, I am confused why it might matter if SIM had a problem creating CoreSettings.config. Didn't you restore from backup?
I guess I'm confused whether the problem now is getting the restored NS to work, or the NS works but you now need to proceed with SP2 and last time it failed on CoreSettings.config. As mentioned, if you're ready to try the install of SP2 again, log on to the server as the application identity and run it through SIM.