Hi BP I'm am so sorry to hear about this and can only imagine the stress this is causing. Try not to let the stress itself take a toll on you because as of right now you really don't know what is going to happen, or what the future will bring whether or not the worst or the best scenario plays out here.
Realistically I do have to agree that the "last hire, first hire" is something to be concerned about, but it is FAR from the only consideration here. Although you have not been there very long, it is also clear that you have made a very strong positive impression on them in both your interview and while you have been there... demonstrating an ability to do your job as well as being a hard-working employee all around. Both aspects of an employee are very important.
If you do fall victim to a "last hire, first fire" policy you can be sure that it is because of a decided policy, not an excuse to get rid of without hurting your feelings. If that does happen, at the very least I would think you could not only get an excellent recommendation from them, but also have some strong effort on their part on helping you find someplace else to work.
However I believe that is only a small possibility of possible outcomes. There are many other ways to decide who to fire. If this was an old company sailing along on past accomplishments and reputation, then last hire, first fire might be a good choice as a policy. But given the description of where you work, specifically currently developing a new product, as well as trying to get past a customer complaint, I think that other factors might provide much better ways of deciding who to let go.
Their goal is obviously to reestablish their reputation and continue to grow, and getting their new software out will be a key factor in that. In many ways the situation is like that of a new business startup. The key focus will be on product and customer support. Since expenses need to be cut, but those cuts cannot jeapordize the progress of this new product, I agree HIGHLY with the other comments here that it may be more important to consider cutting people with higher salaries, and keeping people who can contribute to the growth of the company (rather than the existence of the company) regardless of whether they are a new hire or not.
Under such cirmunstances it may make more sense for them to cut management rather than cut people involved in product development. A "startup" need to get product going, not have a lot of people managing when there is nothing there to manage.
Under such circumstances it is likely that rather than considering hiring date, they may consider how close each position is toward developing and producing product. Departments related to bookkeeping and other "housekeeping" aspects of the company may be cut back so that the people involved with the software itself have the resources and manpower to keep the company moving.
And although you fear having only two people in your department, in light of the latest comments that may be a really good thing. You're department can hardly be considered "overstaffed." They will consider how important each department is to the immediate goals of the company and how many people at a minimum would be required to provide the necessary functions of that department.
I think it is a very good sign that they specifically mentioned "cutting back overstaffed departments" because it sounds like that specifically refers to departments other than yours. At the very least I think it shows that the layoffs will begin elsewhere, rather than beginning with "last hire first fire".
Another factor in your favor is that if they are cutting back on personnel, it will not only be important to keep the most productive personnel but also consider that the remaining people may have to take on other responsibilities to keep the company covered on all bases necessary for operation. If I remember correctly, it was already discussed at your interview that although you have been hired for a specific position, you also have other software skills that might be of use in other areas of the company. At the time, those skills might have been discussed in terms of possibility of promotion within the company, but now those skills might be beneficial toward keeping the company operating with fewer people. If another department is having some cutbacks, you might be able to apply some of your knowledge and skills toward to pick up some of the slack and ensure that department still has enough resources to perform its function. It might not be a bad idea to remind them of that if you have a chance to.
None of this is any sort of guarantee but I do truly believe that it is a good source for hope, and a reason to flush the septic tank "deep down inside" of the "knowledge" that you are going to lose your job. It is very very far from a done deal. The people in charge are obviously giving this a lot of serious thought, and are concerned with their employees well being as well as with the future success of the company. Both of these bode well your you.
And of course there is always the "Joseph Campbell" aspect of this... not matter what happens it doesn't necessarily mean that any outcome will be bad. It is of course incredibly scary to even think about losing your job, on emotional grounds, on financial grounds. But even if you don't get fired this job may not be your current resting point, it may be leading to something better maybe even in the near future. Whether you are retained or fired right now may be an important element in something right around the corner for you. This is not to say you shouldn't be scared, you have every right to acknoledge that fear, but don't let it overcome you or let it cloud your vision to what other things are out there and even more importantly the other things that you have in your life now.
Good luck... I'll be sending as much positive energy as I can your way. Try to do something to take your mind off of it when you can, maybe plan something fun with your family if you can. This will all be there when you get back, and hopefully it will be that much closer to a successful resolution.
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