In that case he would pass on his citizenship to his children regardless of where they were born.
Where were your husband’s parents born? (Not that that would make a difference if your husband himself became a citizen via the law of return.)
Another option, since he will probably have trouble renouncing his own citizenship due to his military obligations, is to just renounce the citizenship of your children. You would only be able to do so after they are born iy”h. And you would have to do it after each child.
http://www.israelemb.org/consular_NatioanlSubj.html
http://www.israelemb.org/forms/renouncement_minors.pdf
BTW, another issue for dual U.S. & Israeli citizens is that whenever they travel between the U.S. and Israel, they (both parents and children if they are all dual citizens) need to each have and carry with them 2 passports – a U.S. passport and an Israeli passport. This is since the U.S. requires all U.S. citizens to enter the U.S. with an American passport and Israel requires all Israeli citizens to enter Israel with an Israeli passport.