They used these motors in 1/4 midget racing 'back in the day' and those guys got 20 hp and more out of them. But they converted them to water cooling and ran total-loss ignitions with lightweight flywheels. Hardly practical.
I think 12-15 hp is pretty achievable though.
Focus on the intake flow and the compression ratio. You might be able to overbore to 3.00 inches, but the gains there aren't much and you've got a pretty good chance of breaking the cylinder wall.
Strip the block and look at the intake & exhaust ports. Then make the intake port look like the exhaust port. You'll have to fill it with epoxy or brass, then reshape it with a gradual radius. One of Carpenter's oversize intake valves will help, too. A 24mm Amal or Mikuni carburetor will easily give you 15hp. "Relieving" the cylinder isn't necessary at the 15 hp level.
Get one of Carpenter's Super Stock cams.
You may have to remove some material from the head to clear the larger intake valve. Keep it to a minimum to keep your compression ratio as high as possible. Carpenter's billet head is a sexy little number, but not absolutely necessary. Use the thinest head gasket you can afford.
Check this out:
Bob's Motor Page one