A binaural noise-reduction algorithm for suppressing lateral noise sources was implemented in real-time and tested with normal and hearing-impaired subjects. With this algorithm, frequency bands with interaural time and amplitude differences characteristic for the "target" direction of the desired speech sound reach both ears without any attenuation. However, frequency bands with an interaural time and amplitude difference deviating from these desired values are attenuated. Speech quality assessments as well as speech intelligibility tests demonstrate a significant noise reduction of up to about 5 dB in signal-to-noise ratio for a dummy-head recorded "cocktail-party situation" in an anechoic chamber. For two additional acoustical situations, however, the subjective speech quality from the algorithm degrades with increasing reverberation, while the output from a real-time "dereverberation" algorithm was ranked higher with increasing reverberation. The results with hearing-impaired listeners suggest a combination of both algorithms, while stressing the importance of binaural listening and binaural hearing aids for the rehabilitation of impaired listeners in noisy environments.