This is something I have seen in the tech forums and as well as tried by myself. So it would be great to share this knowledge with rest of the world.
one fundamental rule in computer world is security vs. productivity balance. Running SQL on a domain controller will expose the AD for too many issues. Following information has been abstracted from various online resources.
For security reasons, Microsoft recommends that you do not install SQL Server 2008 on a domain controller. SQL Server Setup will not block installation on a computer that is a domain controller, but the following limitations apply:
-On Windows Server 2003, SQL Server services can run under a domain account or a local system account.
-You cannot run SQL Server services on a domain controller under a local service account or a network service account. (This is the key issues I had to face)
-After SQL Server is installed on a computer, you cannot change the computer from a domain member to a domain controller. You must uninstall SQL Server before you change the host computer to a domain controller.
-After SQL Server is installed on a computer, you cannot change the computer from a domain controller to a domain member. You must uninstall SQL Server before you change the host computer to a domain member.
-SQL Server failover cluster instances are not supported where cluster nodes are domain controllers.
-SQL Server is not supported on a read-only domain controller.
I do hope these information will helpful when you’ve been requested to carry out a SQL setup on a DC 
http://support.microsoft.com/kb/2032911
http://www.sql-server-performance.com/2006/domain-controller-performance/
