Encephalopathy is an increasingly recognized complication of type 1 diabetes. The underlying mechanisms are not well understood, although insulin deficiency has been implicated. The spontaneously diabetic BB/Wor-rat develops neurobehavioral deficits and neuronal cell death in hippocampus and frontal cortex, which can be prevented by insulinomimetic C-peptide. Here we examined whether contributing factors such as activation of innate immune mediators are responsive to C-peptide replacement. Seven-month diabetic BB/Wor-rats and those treated with full C-peptide replacement were compared to age-matched control rats. Hippocampi of diabetic rats showed upregulation of RAGE and NF-κB, the former being localized to proliferating astrocytes. These changes were associated with increased expression of TNF-α, IL-1β, IL-2 and IL-6 in hippocampi of diabetic rats. Full C-peptide replacement, which did not induce hyperglycemia, resulted in significant prevention of upregulation of RAGE expression, activation of NF-κB and activation of pro-inflammatory factors. In conclusion, impaired insulin activity is associated with upregulation of RAGE and pro-inflammatory factors, and these are likely to contribute to previously described oxidative and apoptotic neuronal cell death. Replacement of insulinomimetic C-peptide significantly prevents this cascade of events.