OK, finally got this resolved. HP said that it is because the kernel on the installation dvds used during the installation has drivers for usb but not reading the cd (or something like that). So, it can't mount the cdrom. That is why they say to use a thumb drive. That is why the virtual cd through ilo should work because it is also a usb device.
We were able to get CentOS 6 installed using the RHEL 6 drivers for the B320i. Thanks to all for your suggestions! :)