The Commodore 65 was developed, true, when the 64 was still selling well despite the Amiga being far superior. Problem with the 128 was it was so expensive having to build 3 computers in one. This would have been a single computer with a Commodore 64 emulation mode rather than completely mimicking the hardware.
As for 'superior graphics' it had the ability to display more colors in native screenmodes then Amiga which at Hi-Res only displayed 16 and Lo-Res, 32. Though Amiga did have HAM to display 4096 it was often difficult to work with because of the limitations of how color changes had to occur between adjacent pixels (ideal use was digitizing images using a camera such as with Digi-View) and you saw few games ever using it (Pioneer Plague).
It had been shipped to developers to begin writing software for it and since it even had casework designed and built was probably pretty close to completion. This is why you see Deluxe Paint for it. I got mine from CMD who had a bunch from Commodore for this purpose. I had a Rev 4 motherboard that I sold. Usual one is Rev 2b.
It was discontinued, IIRC, because it would be too close competition for the 500.
