I think Blanka or Emma might know better than me – but I heard that part of the reason is that your mouth isn’t cleaning itself as well as it normally does (with saliva, or through eating certain foods), so your mouth is filling up with all sorts of decaying bits of food and things. Yummy!
Actually the main reason our breath smells is because of the bacteria that live in our mouths. They produce these smells as they break down nutrients and grow. As Mike said, at night our mouths are doing less and so nothing disturbs the bacteria, allowing them to make as much smell as they want! Also, many of us sleep with our mouths shut so the smell builds up overnight. Mmm… :S