On my website these pages are the same: http://www.widgets.com/sub-domain/ http://www.widgets.com/sub-domain/page1.html Is this Google SEO friendly? Why does this occur?
well, in the same website and under the same domain it doesn't count as a duplicated content so it's ok to leave it like this but it's not a good friendly method .
Yes it does count as duplicated content. You have to choose between those URL's and link with one option. I suggest not to use http://www.widgets.com/sub-domain/page1.html Just link everywhere to http://www.widgets.com/sub-domain/ And if google index this URL with page1.html just redirect it with 301 to /sub-domain/
Google will not penalize a site because of that. They have filter that will throw out duplicated page from the serps. This is not penalization. The best thing to do is to set up 301 redirection. Learn here more about 301 : http://www.tamingthebeast.net/articles3/spiders-301-redirect.htm