OFFICE1.CAB is indeed on your CDROM, although it is a hidden file, so unless you have hidden files set to be visible in your folder view options you can look all you like and you won't be able to find it. The setup routine however, should be able to find it, regardless of whether it is set to visible or not.
Try opening your Control Panel, double click on Folder Options, click the tab called View and select the option to "Show hidden files and folders". Click Apply then OK.
If you do the above you should be able to browse the Office XP CDROM and see the OFFICE1.CAB file for yourself.
Setup should still be able to find it though, regardless of the above, so this probably won't fix your problem. Article Q314810 in the Microsoft Knowledge Base has some suggestions on possible causes and fixes. click here to see it for yourself. It may help.