Yeah, I didn't think dilution would play too large of a factor. Although one would still have to consider that CO2 will still be exhaled for a while even without inhaling more O2, because some is still in the blood. (Even though one exhales all air before inhaling from the balloon, there is still some O2 in the blood from previous inhalations of air.)
What I was worried about is that since both are dissolved into the blood, rather than being actively transported (as is the case with O2 with hemoglobin), I thought that it may be possible for the blood to become saturated with CO2 thus stopping N2O from being absorbed.
The reason I'm asking at all is because I've noticed that the effects from rebreathing a balloon are a lot less pronounced than when one doesn't exhale into the balloon.
Thanks for the explanation.