In the late 80's I worked in a hangar where they were doing a conversion to 727's, removing the center engine and putting 2 MD-80 engines in on the sides. It was a long process, they had a Danish plane from Sterling in for a long time.
It never really took off, the 727's were on the decline back then, now they are all gone but for cargo.
So why did Boeing not develop a twin engined 2 man cockpit version of the 727? I've always liked the 727 better than the 737. It seems that Boeing converted the 737 300-500 into the replacements for the 727. With the much bigger and heavier wing of the next generation 737, there really isn't a suitable Boeing replacement for the 737-500.