Hello John,
The limitation is due to the space allocated for the priority in ISIS Hello packet on the LAN segment. Now the reason you are seeing 128 is because whenever a new adj comes up or if the adj goes down from up -> init we always set the priority to 128. Note, we do not touch the 8th bit because its reserved bit as defined in ISO 10589, we are just adding one into the max priority alue which is 127. I do not understand why foundary allows you to set the priority to 255 because the max priority you can set is 127 according to ISO 10589.
About the INIT problem, check the MTU on both sides, it should match. Also if hello padding is disabled, make sure this is the case on both sides. Also try debug isis adj-packets and see if you get more info on this problem.
Hope it helps,
Faraz