MB 8: Because their main use is at night, and therefore they are called a nighttime garment. However, this would only exempt sheets according to the Rosh; the Rambam says that even a nighttime garment requires tzitzis if worn during the day - and therefore sheets _would_ require tzitzis. There are those who give an additional reason to exempt sheets: the Torah only required tzitzis on something that is worn or wrapped around the body, but not something merely placed on top. And there are those who argue and say that even if what he sleeps _upon_ is a four-cornered garment, it requires tzitzis - and all the more so something that is placed upon _him_. Therefore, the Magen Avrohom says that one should round off one corner, and thereby exempt himself according to all opinions. However, it seems from his words that one should not be stringent here unless the sheet is made of wool, but not with one of linen or another material -- see the reason in the Pri Megadim.
18:3. The earliest time that one can say the blessing for tzitzis in the morning is (9) when one can recognize the difference between the Techeles [blue] and the white strings [from the days when blue strings were used in tzitzis]. {And if he wears them from first light [which is generally 1/2 hour earlier], there are those who say that he should say a blessing - (10) and such is our custom. And if he wears them even earlier, as for example when arising to say Selichos [in the week(s) before Rosh HaShana], he should not make a blessing - and then when the day becomes lighter he should (11) pick them up and bless over them.}
MB 9: When one can recognize etc. - This is the time from which one can see a friend who one sees regularly at a distance of four paces, and recognize him - as is mentioned later in section 58 in the discussion of reciting the Shema.
MB 10: And such is our custom - Look in the explanations of the Gr"a, who ruled like the Shulchan Aruch [our text above]. And in the Pri Megadim it is written that if he is hurried, we will not chastise the person who puts them on at first light [with a blessing]. In any case, it is certainly most correct to wait until the time he can distinguish between blue and white before making a blessing - and such appears to be the Elya Rabba's opinion. And after the fact, it appears that even if he made the blessing before first light he should not go back and make a blessing later, because perhaps the Halacha is according to the Rosh, who ruled that a daytime garment needs a blessing even when worn at night.
MB 11: Pick them up - Meaning, the Tzitzis.