Timeout or Illegal Substitution

[wisref2]

This is a judgement situation so I'd like some feedback.

Play: As the referee is counting guys in A's huddle, a player leaves and runs to the sideline. As the referee ends his count, he finds they still have 11 players on the field - so they had 12 in the huddle. As he blows his whistle and throws the flag, his linesman also blows his whistle - A's coach called a timeout as the referee was reaching for his flag.

What's your call? Penalize the illegal substitution or wave off the flag and grant the timeout.

Does the game situation matter? In this case it was 29-8 late in the game that was supposed to be a nailbiter between cross town rivals (the coach calling the TO is behind), 10,000 people in the stands and a lot of subs being run in and out.

I waved off the flag and granted the timout. To me, the game situation didn't influence my decision. Yes, the infraction had already occured, but I figured since the coach was willing to buy his way out of a penalty, I'd let him do it.