The NP203 drives the front and rear driveshafts equally. To allow for the speed differences in the axle during turns, it has an "open" differential in the transfer case, much like an axle with an open differential allows for the difference in speed between the inside and outside tires in turns. Much like a rear axle with an open differential, if you raise one wheel, all the power will go to that wheel and you don't go anywhere. With the NP203, if you disconnect the front axle from the equation, all the power will go to the front and the truck won't move and is actually free to roll downhill, similar to putting the truck in neutral. In order for an open differential to work, you need similar resistance at all points, which in the case of a full time 4WD truck with open diffs in the axles, is all 4 tires. The NP203 does have a "Loc" function, which essentially locks the center differential so that it operates more like a part time 4WD truck with 4WD engaged. It uses pins in the differential to lock it in place, but using like this for daily driving can wear out the pins and break the differential. So the NP203 must be converted to part time with a conversion kit or the front hubs must remain locked 24/7. The conversion kits do have a few issues, mainly with lubricating the front output of the transfer case so it is recommended when using a converted NP203 to run it in 4WD once a month to ensure the front gets lube.
To convert a 2WD 727 to 4WD, you will need a 4WD 727 to get the output shaft and tail housing from. Small block or big block doesn't matter. You will have to completely dismantle both transmissions since the tailshaft is the last part out the front of the transmission, so it's a good time to do a rebuild in the process.