Is it January again already? Then it must be time to take a look at Xerox's (NYSE:XRX) latest annual report. If you recall from last year, we pointed out that the company's most obvious problem was a waist-deep pile of debt spread around the machine and flowing out the copy room door.

Fortunately for Xerox, over in the corner were standing just the tools needed to help clean up its commercial paper mess: a financial broom and dustpan in the form of $2.5 billion cash and strong continuing cash flow. Combined, those two tools could be used to clear out some of the company's choking debt load and free up even more cash flow that, in theory and far in the future, could conceivably be returned to shareholders someday. But Xerox needed to act quickly and get to work before the Fed pressed the interest hike "on" button, sapping cash flow and expanding debt beyond control.

Alas and alack, judging from yesterday's earnings report, and in particular the attached balance sheet, Xerox's financial broom and dustpan sit still over in yonder corner, apparently untouched these past 12 months. One year ago, we pointed out that, depending on how you measure "long-term debt," Xerox had somewhere between $6.9 billion and $12.3 billion worth of the stuff: $6.9 billion in pure long-term debt, plus billions more in assorted pension liabilities, medical payments owed to retirees, and various other forms of long-term obligations. One year later, almost every one of those line items has grown bigger, not smaller. Pure debt is up $120 million, and with the exception of the inscrutably named entry for "Liability to subsidiary trusts issuing preferred securities," every other entry has inched up similarly. The total bill now ranges from $7 billion to $11.5 billion.

It's not all bad news at Xerox, however. The company's strong cash flows continue to generate the capability of paying down debt, if management can muster the will to do so. The company generated $1.5 billion in free cash flow in 2004. While that's down from last year's $1.7 billion, it's still quite a chunk of change. And speaking of change, Xerox managed to put aside a good $800 million of its free cash over the past 12 months, increasing its cash hoard to $3.2 billion.

If you'll forgive my photocopying last year's conclusion: Xerox's primary liability is, well, its liabilities. Debt, that is. Shareholders should be hoping that it doesn't take the company another year, and a likely doubling of interest rates, to address those liabilities.

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Fool contributor Rich Smith holds no position in Xerox.