2.) Atari had some left over xe computers left. They decided to repackage it as a game system.

The Tramiels didn't want the 7800 to be released. The Tramiels saw the 7800 as an updated 2600 with better graphics with them feeling the 7800 couldn't do nes style games.

It didn't make any sense though. They hurted the 7800 as a result of releasing the xegs.