Continuity mistake: When Princess Mia is announced at her birthday ball, she waves with her right hand and then waves so enthusiastically with her left hand that her bracelet flies off backward. We see it flying fairly high up judging by the door in the background. But when the doorman catches it, its much lower then it should have been (from the previous scene) with a much lower and flatter trajectory.

The Princess Diaries 2: Royal Engagement (2004)
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Directed by: Garry Marshall
Starring: Anne Hathaway, Julie Andrews, John Rhys-Davies, Hector Elizondo, Callum Blue
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Mia Thermopolis: Oh my God, you're here.
Lilly Moscovitz: I know.
Mia Thermopolis: In Genovia.
Lilly Moscovitz: I know.
Mia Thermopolis: You're in my closet.
Lilly Moscovitz: Yeah.
Mia Thermopolis: You're blonde.
Lilly Moscovitz: I'm blonde.
Trivia: In the opening scene where Mia is introduced and waves to the crowd from atop a staircase, (wearing a big red dress) she accidentally flings a bracelet off her wrist, where a footman catches it. That is the same footman who catches the snail Julia Roberts flings in Pretty Woman, and he uses the same line "It happens all the time".
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Answer: My guess is because Mia and Michael didn't actually start dating until the third Princess Diaries book. The second and third books were all about Mia trying to get Michael to go out with her, and since they went out at the end of the first movie, they couldn't base the second movie on the second book.