Step 1: Concept
Check the modulus of the complex number $z = \frac{\lambda+i}{\lambda-i}$.
Step 2: Meaning
$|z| = |\frac{\lambda+i}{\lambda-i}| = \frac{|\lambda+i|}{|\lambda-i|}$.
Step 3: Analysis
$|z| = \frac{\sqrt{\lambda^2+1^2}}{\sqrt{\lambda^2+(-1)^2}} = \frac{\sqrt{\lambda^2+1}}{\sqrt{\lambda^2+1}} = 1$.
Step 4: Conclusion
Since $|z|=1$, all points lie on a circle with radius 1 centered at the origin.
Final Answer: (D)