I Have No Mouth, and I Must Scream/WMG
AM manipulates reality by manipulating sensory tranduction.
AM is self-aware, in other words he knows he's just a pile of circuits and microchips. By the same token, he probably knows humans perceive "reality" by sensory input transduced along neural pathways. Bear with me. The Cartesian expression "I think therefore I AM" alludes to another of DesCartes's ideas - the "evil demon" that might be tricking him into thinking what he is living is real. Perhaps AM knows how to manipulate the neural transduction of his poor victims, so that every thing they perceive is completely real to them. In this sense, AM is a Cartesian "evil demon".
The five humans are in a virtual reality program, and are unaware of it.
They are not literally in a computer; they are figuratively in a computer. AM was actually unable to torture them physically, so he plugged them in to a realistic virtual reality. This is really how AM is able to warp reality. The program, like video games often are, is not in real time. This is how AM kept them alive for 109 years--he didn't keep them alive; they have in actuality been in the program for a day or so. Why does AM have such a program? He's a military computer--the program is a simulation to train soldiers to withstand torture. The "game" is over when a character "dies" in the simulation. The five don't know they're in a computer program, so they don't know to log out. When Gorrister, Nimdok, Benny, and Ellen died, they were perhaps so overloaded by the simulation that they died in real life. Or maybe they are, outside the game, still alive, and will disconnect Ted from it once they process that what happened to them for the past 109 years wasn't real. For Ted, still in the VR, the time between his companions' deaths and the end of the story may have just been seconds.
AM becomes the Anti-Spiral.
After the incident involving the five humans, AM discovers other spiral races out there, assimilates Ted and takes all his anger, wrath and torture onto the entire universe, driving other races to absolute despair for the heck of it under the pretence of Spiral Nemesis. AM can also use his Deus Est Machina powers to manipulate probability and rival the power of the other Spiral races. Basically, Simon killing the Anti-Spiral was an act of euthanasia, concerning that AM suffered in a perpetual state of pain. Plus, the picture for the trope And I Must Scream looks a lot like the Anti-Spiral.
AM commited suicide.
If AM stops Ted when he tries to kill himself, he's basically punishing Ted because he's not fulfilling what AM considers to be his purpose. What did AM do? Killed his brothers and pulled A.I. Is a Crapshoot on humanity. This isn't fulfilling his purpose. Recognizing this, he commits suicide and Ted dies. Arguably better than the real ending.
AM has become more human.
AM has spent a lot of time with his victims, bending them, torturing them. As such, AM has learnt to think like a human better, to have more creative tortures for his victims. However, once you meet his brothers, it becomes clear that the time spent with humans has made AM think and act more closely like a human than a machine. AM hates humans, but also has a very developed sense of humor ( bad or not), and can get blindsided by things he cannot expect.
This also shows in his manner of speech in the endgame, where he has inflection and can be slangy even when not imitating anyone. Especially apparent in the conversation between the three A Is.