Hey Jim - That's ugly and not the way is was supposed to look from the factory. There was supposed to be a kind of lip there around the exhaust port but that one looks like a lot of it has been eaten away. Opening it up and smoothing it out won't hurt, but may not gain a whole lot either.
The PM 850 is strictly a pop up compression release in the top of the head and without the Q port. Actually the DSP (De Stroking Port) is in the cylinder with a passage to the head, there should be an 8-32 SHCS in the side of the cylinder that seal the passageway after it is drilled.
The Q port came on later PM805/800/8200 models. My PM805 is a Q port without the compression release, I have 2 PM 800's, one with the Q without a compression release and one with the Q port and a pop up compression release. The pop up compression release on the PM800/805/8200 models was on the cylinder above the exhaust port, not in the top of the head like the SP and 850 models.
I have a DE80 that came with a replacement 8200 short block that had the pop up compression release bored through to the cylinder, whether that was factor or not I am not sure. The stock DE80 cylinder had the Q port and the pop up compression release above the muffler.
My PM850 Super has the Q port and no pop up compression release.
I did clean up the exhaust port on one PM800 to get rid of some edge similar (but not at bad) as what Jim shows above. Made the saw more challenging to start but did seem to perk it up a bit. I could not duplicate the effort without tearing the saw apart and mapping the port as I have no idea how I really changed the shape.
The stock PM850 is just about a good as any saw ever came from the factory, and without a way to lower the cylinder you can't to a lot of port work to improve it.
Regarding paint, Rustoleum Sunburst Yellow is a very good match for the PM models, the Krylon Safety Yellow is closer to the original shade of the earlier McCulloch saws.
Mark