Was anyone else shocked when Mike said "...and your mistress"? I couldnt believe it. It just seemed out of charachter for Tom to have a mistress.

Yeah, it was. But stress will do that to a man.

Some people here have surfaced earlier scripts of II in which Hagen is shown with a mistress (some say Sonny's widow, Sandra), or skimming money from the casinos, etc. I'm glad these didn't make the final cut.
The point of the "...and your mistress..." line, as it appeared in the final cut, was to underscore Michael's cruelty to a man whose loyalty was never in question, and who, just a few scenes earlier, he was telling that he was "the only one I can trust," and "you're my brother." Plus, if you catch the smirk on Neri's face, you can see that he was the source of that damaging info.

I've never been able to catch that smirk. Are you sure it's there?

Neri does smirk but i just thought he was smirking about Roth. About Tom i think Turnbulls right that mike said it to hurt Tom but i couldnt believe that Tom would cheat on his wife. However he does smirk when Sonny was well... So that explains it, Tom did have a dark streak to him. He wasnt as nice as i thought he was.

Tom didn't seem offended when he "caught" Sonny, in the upstairs bedroom the day of Connie's wedding, playing hide the salami with a woman other than his wife. He just smiled an "understanding" smile and walked away.

It was more than a dark streak. Tom was a party to murder and mayhem. There was little outside of his manners that was nice about him. He facilitated not only Vito's ravaging of people, but Michael's also until the very end. Had Duvall signed up for GFIII, it would have been interesting to see in what light FFC would have cast Tom given Michael's seeming remorse.

I think Tom would help Michael with his personal remorse, how he would have handled other things would have been influential on the plot. For instance he would have opposed Vincent's fast rise to the top, I think, and he would have done a better job getting the Immobiliare thing buttoned up than Harrison did.
While Tom may not have been a good wartime consigliere, he was a master at transactional law. The work he did to get the Corleones control of the casinos and getting them grandfathered in was brilliant. No doubt with Genco's help he also made millions for the Corleones and was able to "legitimize" the money
through their real estate, moving and olive oil companies.

He also would have done a better job of extricating Michael from the Mob, even perhaps persuading him to throw Zasa a bone to keep him off Michael's back and avoid a hit.