Jacob’s teaching on the relationship between law and punishment clearly reflect his father, Lehi’s teachings. In 2 Nephi 2:10 Lehi declared that there is a law given to which a punishment is affixed. Jacob reprises that idea but shifts to the way mercy and punishment are justified. His first argument is that the law sets up the conditions requiring the atonement. If there were no law, then there were no punishment, and if there is no punishment, there is nothing for the atonement to do. Therefore the “mercies of the Holy One of Israel have claim” upon a person who had no law.
For Jacob, the Atonement creates that situation for one who has the law. Without law there is no condemnation. With law there is condemnation, but through the Atonement, that condemnation and punishment are satisfied, or made to be as though they did not exist. Therefore, those who are righteous can be saved through the mercies of the Holy One of Israel. The Atonement makes it possible to be delivered from the monster of death and hell.
Jacob’s sermon is using several oppositions to make his point, and therefore he also notes that death and hell are endless torment as opposed to Jehovah, who gives the breath of life.
Jacob emphasizes, however, that the law does have consequences if we have the law and do not do what we need to do to avail ourselves of the Atonement. Although Jacob does not describe at this point what the awful state is, it is intended to be seen as an opposition to God, and therefore the same opposition as in the previous verse. The awful state is that they are not delivered from hell, or from the endless torment that is the opposite of God.