Step 1: Conceptual Understanding:
Separate variables and integrate, then apply the initial condition.
Step 2: Explanation in Detail:
Divide by $(1+x^2)(1+y^2)$: $\dfrac{x}{1+x^2}dx + \dfrac{y}{1+y^2}dy = 0$.
Integrate: $\dfrac{1}{2}\ln(1+x^2) + \dfrac{1}{2}\ln(1+y^2) = C$.
At $y(0)=1$: $0 + \dfrac{1}{2}\ln 2 = C$.
$(1+x^2)(1+y^2) = 2 \Rightarrow 1 + x^2 + y^2 + x^2y^2 = 2 \Rightarrow x^2y^2 + x^2 + y^2 = 1$.
Step 3: Therefore, Stating the Final Answer
$x^2y^2 + x^2 + y^2 = 1$.