I would allow for the "correction" to make it 2nd and 3.
My rationale:
1) In a hurry up situation, as long as the down box is in position, the ball can (and sometimes does) become live before the chains are in proper position. The chains don't make it 1st and 10, they just indicate the LTG.
2) Especially at the high school level, getting the chain crew to pay attention to the game is often a feat worthy to be told over post game beers. Mistakes they make are common and numerous. I'm not saying throw them under the bus here, but the chains are often guidelines more than anything.
3) What would you do in this scenario: A gets a first down at the B39. The lead stick assumes it was at the big line and stands at the B30, making it look like 1st and 9 (and completely ignoring the slack in the chain). A gains 4 yards on both 1st and 2nd down. During the dead ball before 3rd and what looks like 1, but is really 2, the lead stick realizes the slack and moves to the correct position. Do you make him move back to where he was, or realize he should have been at the 29 the whole time and it's 3rd and 2 like it should have been?