Hi Chris-
The 261 is a great engine for hopping up. It is full oil pressure engine with a cylinder wall thickness that allows a safe bore to .080 oversize. The later 261s had a full-flow oil filter system. The big GMCs offer more HP possibilities, but are hard to find. You should look for a later 261 cylinder head... It will add more HP, and it will bolt right onto your 54. If you are going to replace the cam, I suggest that you tear the engine down and determine it's condition. A total rebuild is the safe way to go.
My 261 is bored 80 over with a mild cam, dual valve springs, aluminum pistons, fenton dual exhaust, and three webers on an offenhauser intake. It is probably around 200 HP. Not a whole lot in today's terms, but a noticeable difference. The original produced 148 HP.
I've done the 3:55 rear gears from Patrick's. I'm still working out the bugs on that.
If you want to really talk 261's, go to
http://www.inliners.org/. Lots of very knowledgeable guys there. Join the club and you will be able to access the archives. The old timers there can answer any questions that you have.