There are alot of baby items that we have been able to use and reuse.
One problem that I have found with recycling toys is that if the child remembers the toy; the child wants the toy. Go figure.
It was easy passing everything from my first to my second but passing onto my third is sometimes a struggle. Son 1 doesn't remember having the toy but reminds Son 2 that the toy is his (son 2's) rather than third child's. Bummer!
Here is a good post from Moolanomy regarding spending tips when having newborns.