1. During the stamping process in Mexico, in the form DS 156 where they ask: "Have you ever been arrested or convicted for any offense or crime, even though subject of a pardon, amnesty or other similar legal action? Have you ever unlawfully distributed or sold a controlled substance (drug), or been a prostitute or procurer for prostitutes?" I answered NO (based on the fact that the case was dismissed, and all records expunged and what my then counsel told me to answer in case of such questions). Was this Answer correct?
No, your answer was not correct. You were specifically asked to disclose your arrest even if you received a pardon or expungement.

2. Since my H1-B visa stamping has been placed in 221 (G)"Administrative Processing" and I, cannot enter the US till this is resolved. ( The process could take up to 90 days).
a. Can I apply for a separate B1/B2 tourist visa from the US Consulate in Canada, while the H1-B Administrative Processing is still on going? If yes can that tourist visa be also subjected to administrative processing?
Maybe. Contact the Consulate and explain your situation.

With respect to your other issue, you're kind of stuck. Your best course of action is to retain the services of an immigration attorney.