Struggled to resolve it, went through all possible solutions I could find on the internet without success. Then it hit me at some point, I was sober I guess.
32/64 bit?? How can this be a problem I asked myself since the error referred to compatibility?
Troubleshoot and Solution:
First thing I did was to check the versions of IE, Windows OS and Office installed. I had the following installed:
MS Office 64 bit
IE 32 and 64 bit
SharePoint Server 2010 enterprise
If you have a MS Office 32 bit, then use a 32 bit of IE to open the Web app, when you have installed a 64 bit Office then open the web apps with a a 64 Bit version of IE. Problem solved.
Ta!