What can you make with nearly any piece of clothing past it's prime? A napkin of course.
Napkins range in size from a 16 to 18 inch square dinner napkin, 12 to 14 inches for a lunch napkin, to 4 to 6 inches for cocktail napkins. You can cut at least one square, of one of these sizes out of even baby clothing.

A little while ago my husband ripped a large gash in a nice button down oxford shirt. When I finially got around to cutting it up, I was suprised to find that I was able to cut 4 12" squares from the back and sleeves of the shirt that I can make into luncheon size napkins. The rest of the shirt should yield at least 4 more 4 to 6 inch squares for cocktail napkins. One of the finished napkins is pictured below.
How to do it:
1) Cut as many squares of the desired size as possible out of the ruined piece of clothing (make sure you cut the squares with the grain of the fabric, rather than at an angle to it. If the fabric is woven, and as thick as you feel a napkin should be you can simply stop here (woven fabric cut on the grain will unravel very little after washing).
2) I felt that my squares were too thin, so I doubled them up. You could then hem the pieces under, or stitch around the edges so that the pieces stay together and leave it at that. I decided to make mine a little more polished, and decided to use bias tape to finish the edges.
3) Bias tape can be found in any craft store; however, it can also easily be made out of any light weight woven fabric, and since this is all about reusing that is what I did.