Its telling you to simplify u(x,y) as part of another function h(t). Choosing
[tex]h(t) = \frac{t}{(1+t^2)^{1/2}}[/tex], then h(u) =
[tex]h(u) = \frac{x-uy}{1+(x-uy)^2)^{1/2}}[/tex] which is your original function. From there:
[tex]u(x,y) = h(x-uy), u - h(x-uy) = 0[/tex], where you can solve the PDE