So here is what I did and it worked:
1. Created a directory inst on my ftp server under /var/ftp/pub/inst
2. Copied all the packages from the DVD or you can say from a folder to this location. Say using DVD: cp -arv /media/RHEL 5 \Linux/Server/ /var/ftp/pub/inst
3. Restarted vsftpd services on my FTP server.
3. Booted the system that needs to be installed using a bootable RHEL5 DVD and then did: linux askmethod at the prompt. It prompted me how I would like to install. I selected over FTP.
4. When I reached this point: http://www.centos.org/docs/5/html/In...l-ftp-x86.html
I mentioned FTP site name as the IP address of my FTP server and Red Hat directory as /pub/inst
5. And the installation continued without any error and completed successfully.
Am not sure how you are trying to do it.