First issue was this server did not have a DVD drive, so I copied the bits to the local data disk and started the install. The install went fine without any issues. My next mega issue was, when the server restarted after the install it just hung while loading Windows. Next, I tried to restart it in safe mode. This showed me that it froze after loading crcdisk.sys.
Googling for information led me to a HP support forum which said that Windows 2008 server is not supported on DL380 G3 models. On the same thread someone had mentioned that the latest SmartStart tool allows you to install Windows 2008 server on DL380 G3 models.
My next stop was HP's support site to download the software. I select my server model and for the operating system I selected Windows Server 2003 and downloaded HP SmartStart CD x32 version 8.25. Used the CD made from the downloaded ISO image to restart the server.
Using SmartStart I was able to select Windows 2008 as the operating system and it also allowed me to install it from a USB drive directly using the ISO image. After a few minutes the server was up and running. There is no option to upgrade using SmartStart, so I ended up deleting the system partition and recreating it again. Which means all your data is lost, lucky me I had my data in a separate partition.