Continuity mistake: When they are looking at prospective husbands, Princess Mia and Lilly are eating popcorn and Lilly asks if it tastes like pears. Princess Mia answers its a "Genovian specialty," and the popcorn disappears immediately afterwards. (00:25:45)
Continuity mistake: In the fan lesson, when Queen Clarisse puts the fan over her face, it shows the back. When it cuts back to her, it is showing the front. This happens twice. (00:37:15)
Continuity mistake: When Princess Mia and Andrew are at the seashore, we see Andrew with two cameras; one around his neck and the second across one shoulder. When they are running after Princess Mia's scarf, we still see the cameras. But when they are flat down on the sand and Andrew wraps the now recovered scarf back around Princess Mia's neck, Andrew has no cameras. (00:27:05)
Continuity mistake: When the Queen is listening to the problems of the Genovians, we see a shot of the other Genovians waiting in line for their turn to speak with the Queen. The next person who speaks to the Queen is Jacqueline, but we didn't see her in line, and after that is Tiny Duval, but we didn't see him in line either. (00:38:35)
Continuity mistake: When we see Asana mattress surfing, the mattress she comes down the slope has no label on the front. But when she reaches the bottom, there is a label (or two) on the top front center. (01:01:00)
Continuity mistake: When Princess Mia and Nicholas duck into a closet to finish discussing the "lie-dance," we see Nicholas reach across to turn off the closet light. As he touches the light switch, we see he has a wristwatch on. But the very next shot is a close-up of him actually twisting the switch, and either he has no watch on or it is now under the sleeve. (00:33:50)
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.