We investigate the interaction history of the M31 subgroup by comparing surface photometry of two of its satellites, M32 and NGC 205, with N-body simulations of satellite destruction. The recent discovery of a giant stream in the outer halo of M31, apparently pointed in the direction of M32 and NGC 205, makes such an investigation particularly relevant. The observational component of this study is based on 17 × 5° B- and I-band CCD mosaic images centered on M31 and covering both satellites. Standard ellipse-fitting techniques are used to model and remove M31 disk light and to perform surface photometry on the satellites to limiting brightness levels of (μB, μI) = (27, 25) mag arcsec-2, corresponding to isophotal semimajor axis lengths of r = 420'' (1.6 kpc) and r = 720'' (2.7 kpc). A hint of excess light in the outer parts of M32 noted in earlier studies is confirmed; in particular, clear evidence is seen for a sharp (upward) break in the surface brightness profile at r = 150'' relative to a r1/4 law that fits the inner region of M32. This break is accompanied by a steep increase in isophotal ellipticity , as well as position angle ' twisting. In addition to this excess, evidence is seen for an inner downward break in the surface brightness profile at r = 50''. The robustness of the M32 isophotal features is demonstrated through their (1) insensitivity to the details of background subtraction, (2) symmetry about M32's center, and (3) narrow range of B-I color that is consistent with the interior regions of M32 but not with M31 residual spiral arm/dust lane features. The study of NGC 205 reveals pronounced isophote twisting at r ~ 300'' that is coincident with a subtle downward break in the surface brightness profile, relative to an exponential law fitted to the inner region. The simulation component of this project is based on the analysis of single-component, spherical satellites that are being tidally disrupted through interactions with their parent galaxy. Generic features of the simulations include an excess in the surface brightness profile at large radii, a depletion zone at intermediate radii, and isophotal elongation and twists that are coincident with breaks in the brightness profile. The two satellites, M32 and NGC 205, display most of these features consistently across the B and I bands, which is strongly suggestive of tidal interaction and probable stripping by M31. We discuss what these observed features can tell us about the satellites' orbital parameters and histories. Specifically, M32 is found to be on a highly eccentric orbit and away from pericenter. Investigating M32's unusual combination of high surface brightness and low luminosity (the hallmark of compact ellipticals), we make empirical estimates of the galaxy's intrinsic properties and conclude that it is not likely to be the residual core of a tidally stripped normal elliptical galaxy, as has been suggested, but rather that its precursor was intrinsically compact.