I've been doing some smithing and I found a pendant of what looks like an eye that's bleeding or crying. Where does that symbol come from?

Are you talking about http://en.wikipedia.org/wiki/File:Neverwinter_Nights_cover.jpg

That looks similar to the College of Winterhold's symbol. What does the pendant do?

Yep, I thought I remembered seeing it elsewhere. Ahh, it's from a jewellery mod. It's actually really good, but it seems someone's slipped a D&D item in there! Naughty naughty! lol