The fact that you have $1.25 leads me to believe some/all of the mutilated money is in coin form. I've never dealt with the fed directly, but I know they don't deal with coins. Coins are issued by the treasury department or someone.
I agree with the above. We send ours to the Fed. We don't deal with coin, though. If someone brings in a coin that is in bad enough shape that it would be consideded mutiliated, we tell the customer that we won't accept it.
Mutilated coins must be sorted by type. Then after reaching so many pounds this can be sent in. Though shipping is charged by weight and could be more than the melt down profit! Advice, give it all back to the customers.