Due to the size and scale of the project, it would be hard to give you suggestions just based on a photo of the exterior. Adding a 2nd story, is going to require MAJOR structural redesign on the interior. Your best bet would be to hire an architect for this project.

I second that recommendation, hire an architect for help in investigating your options.

Definitely recommend hiring an architect/designer. You will be much happier with your finished product and they can help you decide what to add on and where. You might want to consider using a General Contractor as well, since it will be a large project. Here is a link to a 1925 Bungalow we gutted and renovated. Maybe it will give you some ideas.
http://www.flickr.com/photos/beckreit/sets/72157626240312674/with/5515710377/

Best to work from the inside out instead of the outside in as far as design is concerned. There are any number of things that would work for a second story on this project, but kind of pointless to explore without knowing the floor plan. Definitely consider hiring professional design help.

Thanks for the advice everyone...a designer/architect was definitely in the plans. If it helps with any suggestions, I can give an description of the existing floorplan (to Bryce's point):

The home is essentially divided down the middle (at about the left edge of the front porch) . You enter into a living room with fire place...to the left is a small dining room. Both rooms are the same depth. From the DR, there is a doorway to the kitchen. From the LR, there is a doorway to a "hallway" - more like a roundabout than a true hall however as it is just a large open square-shaped area that leads to the remaining rooms. Once in the hall, there is a doorway to the left for the kitchen and to the right for the bathroom. Ahead are doorways for the 2 bedrooms - the back right corner of the house is the guest room and the back left corner is the master bedroom (essentially no difference between the two rooms though).

Considering pushing the back wall of the house back about 10 feet and/or maybe building out towards the open area on the right side of the house where the garage once stood