from about.com, damaged paper money:
What is 'Not' Mutilated? Not mutilated but damaged currency includes any bill that is CLEARLY more than one-half of the original bill, and does not require any special examination or investigation to determine its value. Examples of non-mutilated bills include those that are badly soiled, dirty, defaced, disintegrated, limp, torn or otherwise "worn out." These damaged-but-not-mutilated bills can be exchanged through your local bank. Replacing Mutilated Currency Mutilated currency is considered to be any bill NOT CLEARLY more than one-half of the original bill and/or requires special examination to determine its value. Most mutilated currency has been damaged by fire, flooding, chemicals, explosions, animals or insects. Another very common source of damage to currency is petrification or deterioration by burying. Mutilated currency must be mailed or personally delivered to the Bureau of Engraving and Printing.