[c-nsp] 7204 VXR, NPE-225, PA-2T3, output queue drops

[Raymond, Steven]

Got a 7204, NPE225, 12.1(14)E7, a single PA-2T3 with one circuit on it,
which seemed to recently develop some nasty packet loss.  Checked CPU, it's
fine at 24%.  Memory OK too.  Physical interface stats show the circuit is
clean on both sides.
However the 7204 is accumulating lots of output queue drops on the
serial1/0.  Running about only 30-35Mb/s (about 10,000pps averaging
something like 350bytes/packet), which while high, I would not expect to be
seeing 10s of thousands of output queue drops per minute.  Queuing is
currently set for FIFO.
Someone suggested messing with the queuing buffers, which I have never had
experience with helping at all.  But to my surprise, when he did "hold-queue
600 out" on the serial interface config, the output queue drops ceased.
It seems to be cured now, but it would be the first time for me that such a
queuing adjustment was necessary.  Any ideas on what exactly is being
exhausted here?  Is it normal for this bunch of hardware to not even be able
to handle a DS3?  Is it a software bug or some limitation of this NPE?
Router is not running any routing protocol, just static and nothing fancy at
all- just pushing IP packets.  Only two interfaces, the t3 and fe.  My
experience is mostly with 7500s and I've never seen the problem, so any
advice or anecdotes are appreciated.
Thanks