There is a much simpler proof.
Since $xy > \frac{1}{2}$, $x$ and $y$ must be non zero numbers, which are both positive or negative.
Suppose $x>0$ and $y>0$.
If $x>1$, then also $x^2>1$, and $x^2 +y^2>x^2>1$ is obvious.
Take $0<x\leq 1$ and $y>0$.
Since $0<x\leq 1$, the function $f$ with $f(x)=\sqrt{1-x^2}$ is well defined. Let $g$ be the function with $g(x)=\frac{1}{2x}, \ 0<x\leq 1$.
It can be easily proved that the function h with $h(x)=-x+\sqrt{2}, \ 0<x\leq 1$
has a graph which is a line tangent to the graphs of $f$ and $g$ at the point
$(\frac{\sqrt{2}}{2},\frac{\sqrt{2}}{2})$.
One can also verify easily that $f$ is a concave function and that $g$ is a convex funtion. Therefore the tangent line $h$ is above the graph of $f$ and below the graph of $g$.
So if $0<x\leq 1$,the previous remark implies that $f(x)\leq h(x)\leq g(x)$ and $\sqrt{1-x^2}\leq \frac{1}{2x}$.
Now, the proposition we want to prove is obvious: If $xy > \frac{1}{2}$, then $y>\frac{1}{2x}$,
and $\frac{1}{2x} \geq \sqrt{1-x^2}$ from the previous inequality, hence
$y> \frac{1}{2x} \geq \sqrt{1-x^2}$. Consequently, $y>\sqrt{1-x^2}$, which implies
$y^2>1-x^2$ and therefore $x^2+y^2>1.$
The case $x<0$ and $y<0$ is similar.