A vegetarian who consumes dairy products - in other words, a vegetarian. The 'lacto' is redundant, because all true vegetarians have no qualms about dairy - the word vegan is already in existence for those that do.
Charlie: I'm making grilled cheese, you want some?
David: You eat CHEESE? And you call youself a vegetarian?
Charlie: Uh, yeah. Cheese isn't meat, so it's OK for us to eat it.
David: No it isn't! Being a vegetarian means you can't eat animal products at all.
Charlie: No, that's wrong. You're thinking of vegans.
Charlie is a lacto-vegetarian, and David is a vegan. Neither of these two people are real.