dos is still alive and well, actively used in ATM (bank teller machines) cash registers, gas pumps, and the like. Basically is one of the most widely used embedded operating systems. The tools and (used) books, web information, etc are still available, inexpensive, etc. A balance of just the right amount of system calls with the freedom to get at the hardware without the OS getting in the way. The windows 3.x based kernels (windows 3.x up to windows 98 or maybe me) also easily allow for direct access with minimal operating system interference. Linux, Windows nt based kernels (windows nt, 2000, xp, etc) do not have those features, are too high level in their drivers, too much operating system in the way. The connection from dos/win3x to the present windows is still there and the student can then understand and use the more advanced/complicated modern operating system.
Encouraging DOS, AmigaOS, pdp-11 assembler, 6502 assembler, and the like in the curriculum is a good thing for future generations not a bad thing. Perhaps call it hands on computer history if you like but it is important to get a well rounded education in software engineering. Students will get a better understanding of the C language for example when they see the platform it was developed on/from (pdp-11/lsi-11). pdp11 is probably one of the best first assembly languages to teach (or msp430) and x86 is clearly the last you would ever teach if ever. (well briefly touching on I/O mapped memory vs memory mapped memory is important, also segmented architectures and how they were used instead of mmus is important, perhaps taught along side some harvard and other now less popular architectures).
Behind the curtain knowledge is dropping off at an alarming rate in the software industry. To the point of being a crisis. Fixing that starts at the schools. You cannot learn it with linux or windows 7 or anything like that.
If you want to replace this class with something else then non-operating system (non-rtos) microcontroller work. msp430 or ARM are good platforms for teaching C interrupts, have good tools, are good instruction sets for teaching for the some assembly that is required. ARM being the most widely used processor today means the student would be immediately marketable for the devices using that platform (mp3 players, mobile phones, pretty much everything handheld). avr and arduino is not bad, covers the same c and interrupt thing, but is not a great instruction set for teaching.