Bringing back an oldie... Hey Lou, I see your engine is an '86, however the cylinder appears to be from a later model, due to the water connections. Your decompression mechanism is where a water hose would be on an '86.
The general consensus over on CR500riders.com is that the later cylinders won't fit the early cases unless some machining is done. I seem to remember something about different case heights, as well. Did you get your engine this way or did you do it yourself?
I am modding my engine to use the later clutch assembly and right cover, and using a later cylinder would allow the water connections to line up properly.
1985 ATC 250R
1985 CR500R
2000 CR500R