  We present the first high-resolution, soft-X-ray spectrum of the prototypical
Seyfert 2 galaxy, NGC 1068. This spectrum was obtained with the XMM-Newton
Reflection Grating Spectrometer. Emission lines from H-like and He-like low-Z
ions (from C to Si) and Fe-L-shell ions dominate the spectrum. Strong, narrow
radiative recombination continua (RRC) for several ions are also present,
implying that most of the observed soft-X-ray emission arises in
low-temperature (few eV) plasma. This plasma is photoionized by the inferred
nuclear continuum (obscured along our line of sight), as in the unified model
of active galactic nuclei (AGN). We find excess emission (compared with pure
recombination) in all resonance lines (np to 1s) up to the photoelectric edge,
demonstrating the importance of photoexcitation as well. We introduce a simple
model of a cone of plasma irradiated by the nuclear continuum; the line
emission we observe along our line of sight perpendicular to the cone is
produced through recombination/radiative cascade following photoionization and
radiative decay following photoexcitation. A remarkably good fit is obtained to
the H-like/He-like ionic line series, with inferred radial ionic column
densities consistent with recent observations of warm absorbers in Seyfert 1
galaxies. Previous Chandra imaging revealed a large (extending out to 500 pc)
ionization cone containing most of the X-ray flux, implying that the warm
absorber in NGC 1068 is a large-scale outflow. To explain the ionic column
densities, a broad, flat distribution in the logarithm of the ionization
parameter ($\xi=L_X/n_e r^2$) is necessary, spanning $\log\xi=0$--3. This
suggests either radially-stratified ionization zones or the existence of a
broad density distribution (spanning a few orders of magnitude) at each radius.
