I have reproduced this bug again but now I have a better work around.
When ubiquity asks for your name on the page where you create acounts
and setup your hostname and it says your custom hostname is invalid put
the cursor in the filed for your name and hit backspace to delete the
last character of your name then type it again. And it now accepts a
valid hostname as valid and continues to install.

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https://bugs.launchpad.net/bugs/1398977

Title:
  all hostnames on network appear taken when changing hostname.

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