I think the difference between James and Paul is their definition of "faith". I found Piper's analogy helpful... when he preached on James he said, "If an American says he wants to play soccer and a European says he wants to play football, and they argue about it all day, that'd be a wasted afternoon." Americans and Europeans define the word "football" differently.
Similarly when James says salvation is not by faith alone, he is using the word faith differently from Paul, and it is important to understand how he is using the word because he is right.. if we go to an extreme (as has been done in much of Protestant America) we can end up teaching people they're saved when all they have is the dead faith James speaks of.
Normally I think of the type of "faith" James speaks of as mere "belief". Now, don't get too hung up on the exact words (there are verses that say if you believe you will be saved), focus on how the words are being used. These days when people say they "believe" something (at least in my neck of the woods) they mean they have come to a cognitive, logical understanding that it is true. We speak of "believing" in evolution or "believing" in aliens. If you ask any evolutionist why he believes in evolution, he will tell you something like, "Because it makes sense." If that is all there is to your Christianity, a mental understanding that Jesus is Lord, then there is only condemnation for you. As James says, "even the demons believe and they shudder!"
But if I ask you if you have faith in your wife, that's a very different question from whether you believe in evolution. If I ask you why you have faith in your wife you will probably tell me about all the times she's been there for you and held you up when you were weak. You'll probably tell me about how she's never given you any reason to doubt her faithfulness, how much she means to you, how hard it would be for you to live without her, how you trust her with your money and the raising of your kids, how you know you can rely on her. To have faith in a person is a very different thing than believing an idea. If you say you have faith in your wife yet you don't trust her with your kids, your faith is dead. It's not real faith.
From much of Protestant America, we can get the idea that faith is simply believing an idea, that if we are aware of the facts of Jesus and be convinced they are true, that's sufficient belief. And for those people, James is very good because James says, "No, if that's all the faith you have, your faith is dead."
But there are other kinds of people who get this idea that we can get right with God on our own righteousness, and for those kinds of people Paul is very good because Paul says, "if righteousness were through the law, then Christ died for no purpose" (Gal 2:21).
So James and Paul are in agreement, they're just using the word "faith" in different ways. There is a very real danger in thinking that if you are convinced Jesus is God, you will be saved. But many who even do miracles in Jesus' name will be cast from his presence (Matt 7).
Another, helpful, way to think about it is whether or not you really believe if you don't act like you believe, which is the angle John comes from. If you truly believed God kept his promises, you would not be unfaithful. Every sin you've ever committed has had unbelief behind it. When you sin, you are outwardly expressing an inward lack of belief that God will keep his promises. And if you live in unrepentant sin, you don't truly believe, as 1 John says. Jesus said the kingdom of heaven is like a treasure that a man finds in a field and goes and sells everything he has to buy the field so he can have the treasure. If you haven't sold everything you have to buy the field to have the treasure, then there's something you have that you value more than the treasure, so you don't truly believe God is your most valuable treasure.
Scripture comes at this from many angles, and there is much more that could be said on this, but I'll just stop here and point out that when scripture seems to be contradicting itself (such as Paul saying "faith alone" and James saying "not faith alone"), it's usually trying to teach us something about our hearts.
For instance, Jesus said, "When you give to the needy, do not let your left hand know what your right hand is doing, so that your giving may be in secret. And your Father who sees in secret will reward you" (Matt 6:3-4). But in the same gospel Jesus said, "Let your light shine before others, so that they may see your good works and give glory to your Father who is in heaven" (Matt 5:16). So are we supposed to let others see our good deeds or do them in secret? Jesus is teaching us that whether you do it in secret or in the open depends on whether you would be doing it for your glory or God's glory. The outward action isn't nearly as important as the heart.
So when Paul says, "faith alone saves" and James says "faith alone does not save", we need to stop and consider why they appear to be contradicting each other. It's because they're addressing issues of the heart and coming at it from different angles because different people have different idols, different sins, different weaknesses, and are blinded by Satan in different ways.
I hope my unorganized thoughts can be helpful in solidifying your understanding.
I recommend Piper's sermon
Does James Contradict Paul?
Nathan