[Jubal Harshaw]

Actually, it's because N2 contains no oxygen. Room air contains ~21% O2. The O2 combines with the rubber in the tires, forming a solid oxidized rubber dust. This process:

(1) reduces the amount of gas available to keep the tire full (since the O2 is no longer a gas)

(2) causes the tire to fail.

N2 doesn't react with rubber (or with anything else, for that matter, under the conditions found inside a tire), so it stays in gas form, and the tires last longer.

Water vapor is also theoretically bad for the inside of tires, since it allows microorganisms to grow in the tire, but vulcanized rubber is apparently toxic enough to the little buggers that this is generally not a problem.

[HiTech RedNeck]

I've never heard of tires being found full of oxidized rubber powder. It would seem to me that if this truly is a problem, some kind of coating on the inside of the tire would work just as well.

[Jubal Harshaw]

Whoops. I forgot about the effect of water + O2 on the metal parts of the tire. Water + O2 rusts the steel belts and valve parts of the tire. Yet another way in which N2 (no H2O or O2) improves the life of the tire.