Musette was a freshman from Snake Hall that Damien dated last year. It is unclear what, precisely, occurred but she seems to have been expelled - or she left and never came back. In either case, she isn't here as a sophmore this year.
The details of what exactly occurred to cause Musette to leave the school are extremely unclear. While you can ask three people (Damien, Angela, and Isobel), each story has points that contradict with each other. Damien claims that she researched into forbidden magics even after he tried to discourage her from doing so, and she was expelled for it; Angela claims that Damien did something that caused Musette to get expelled. Isobel claims that Musette chose to leave because she was a Wildseed and gave up on the magical world.
If Angela is telling the truth, it is possible that Damien mentioned something - perhaps a type of obscure magic, or something about his demonic heritage - to Musette that he knew would catch her interest and then told her that she would get expelled if she was caught reading about it, knowing that she would be likely to research into it anyway.
Early in the year long before Gary Stu "releases" Musette, Suki says that Musette needs more friends. [Need full quote]
On Ellen's path, Minnie says that Musette was expelled for trying to mix magic and technology, and that she "had a good reason" but that wasn't enough to protect her. Minnie doesn't mention Damien at all. Musette's "good reason" is that she had a heart condition that could be managed with science or with magic, but Musette believed would eventually kill her. You learn about it either further down the Ellen's route or on Minnie's route.
Further down Ellen's route you learn that the Musette you mean was a collection of memories that were stored in a combination of Magic and Technology that the "real" Musette created and the "Memories" Musette is running out of magic so you send her to the Otherworld.
The verdict is still out on how the "real" Musette created the device but Madame Headmaster does say something about how the "Memories" Musette may have been created in the first white magic class you take. The impression you get is that you can control a spirit and get an object capable of independent thought and motion but "Don't do it. You will regret it."