Please post pictures. I'm not sure what you mean by "protect it." Do you mean protect painted drywall from your 3-year old boys? Are you looking to invest additional money like in a wainscoting? I would just paint the wall in a washable finish (eggshell or satin), get some dry erasers and plan on repainting in 5 years.

This is more using maybe than protecting but you could do a chalkboard paint under a chair rail
http://houzz.com/photos/218566

I would like to protect the drywall from getting messed up and the paint from getting scuffed from toys etc.. Is there some kind of protector, like rubber :). What is the best washable paint? I don't have a picture yet as we are in the process of getting the contractor in.

Chalkboard paint!!!

I found something called "lionite" (I kind of thin white plywood) that I stuck up on the walls of my kid's rooms (I got it in Lowes and I really am not sure of the namebut it was something like that). It was great as I could use markers to draw and wipe off, stick things on it and it was pretty tough. When they grew up, I removed the sheeting.

Pic 2 is the closest I could find to rubber walls--sure your husband would love it, I know mine would.

Children do better with low shelves to hold toys. It helps them find their toys and put them away independently (with gentle encouragement from you and the "clean up" song). If you use bins, attach a photo of the item on the outside of the bin. This also helps babysitters and visiting relatives help the children clean up.

I have worked in schools for many years. I do not think it is good to breathe chalk dust. I do not like to clean it off the floors and carpets, and I do not like to have to wash it out of my clothes.
A preschool in my city painted an outdoor concrete wall with green matte paint. (It makes the area look like it has more vegetation than it actually does.) The children can use sidewalk chalk on it, and the wall can be hosed off.

KB, the second photo with the wrestling mats placed on the walls is a good solution for active play in a room.

If you google lionite tileboard, you'll find info. on ASV's rec. Once again, however, unless you are really concerned about damage to the drywall, not just to the paint, it sounds like the "solution" is more work and expense than just repainting when your kids get a little older. Further, once you furnish the area including, large toys, toy containers, furniture, etc., you might find that not that much wall is actually left exposed. I have 4 young kids relegated to the basement daily for play and while the french doors have suffered one casualty the walls will simply need to be repainted before me move.
About lionite:
"Georgia-Pacific introduces Lionite tileboard, an inexpensive alternative to tile. Lionite's tough, baked-on melamine finish is water-resistant and can be cleaned with soap and water. The broad selection of Lionite decorative colors and patterns are available in flat and scored surfaces."

I agree with eztia, I wish I had visited a good preschool before picking out toy storage. A good preschool knows exactly the best way to store, organize and rotate children's toys, books, costumes, etc. I would have bought some short bookcases and clear containers for each type of toy and labeled them. I would also have limited the amount of toys that I allowed into the space by the amount the space could comfortably contain. I advised my sister not to get her children any toys, when I visited her home, her son was stacking the canned goods:)

Thanks KB - I had picked it up before I really knew much about these things. It worked fine, but you make valid points as well. I used them around the whole room and where there was space: above the bed, by a desk etc it did work.