Here is what I found about Kristy's previous record deal (she was 17 at the time). Seven years ago is a pretty long time to have had a deal. The following is directly from the site, so should be pretty accurate (dated Aug 7, 2001):

"Kristy Lee

Kristy Lee Signs In Triplicate with Arista, Britney, and BMI

Brand-new Arista Nashville artist Kristy Lee continued to establish her roots in Music City by signing a songwriter affiliation deal with BMI at their Nashville offices. In addition to her label contract, Lee recently inked a deal with Britney Spears' newly-formed production company as its debut artist. Superstar Spears, a BMI affiliate, has already agreed to make a cameo appearance in Lee's first video."

I don't know if Britney ever appeared in a video with her. I found a video below of Kristy, but didn't see Britney in it. It sounds like Britney's new production company never got off the ground. 2001 was the year Britney turned 18.

This is kind of interesting:

And her video (didn't see Britney in it):

My guess is that she was dropped from the label sometime in 2001 or 2002. There were a LOT of artists being dropped at that point in time. Although Carly's CD supposedly sold less than 400 copies with $1M or so in promotion, I haven't found anything to indicate any promotional budget for Kristy's debut CD.