We present two newly discovered compact elliptical (cE) galaxies, exhibiting clear evidence of tidal steams, and found during a search of SDSS DR7 for cE candidates. The structural parameters of the cEs are derived using GALFIT, giving effective radii, R-e, of 388 and 263 pc, and B-band mean surface brightnesses within R-e of 19.4 and 19.2 mag arcsec(-2). We have re-analysed the SDSS spectra, which indicate that they possess young to intermediate-age stellar populations. These two cEs provide direct evidence, a 'smoking gun', for the process of tidal stripping that is believed to be the origin of M32-type galaxies. Both are in small groups with a large spiral fraction, suggesting that we may be seeing the formation of such cE galaxies in dynamically young environments. The more compact of the galaxies is found in a small group not unlike the Local Group, and thus it provides an additional model for the understanding of M32.