System # never featured any memory protection, even with later 680X0 processors with MMU's
It also lacked preemptive multitasking, instead featuring cooperative multitasking.
Logical separation of OS and Application only occured in the filesystem. I was always fond of System # FS simplicity and neatness. The resource and data forks file model greatly simplified the OS. An application would be a single file, containing code, configuration, and dependencies.
A bootable OS consisted of handful of files in a System directory. One could achieve OS upgrades or enhancements by simply dropping a single file. No dependency nightmares.
Applications could be copied or move freely between folders, allowing groups of applications and documents/files to be arranged logically in the Finder, bypassing the need for shortcuts or startmenus. You could insert a disk and just run an application from it.
Sadly that all ended with the arrival of PPC architecture, mac clones and ports of Windows apps.