James in this passage is referring to someone who has already entered into temptation:

The rebellious purpose formed in the heart needs not expression by word or act to consummate the sin, and bring the soul into condemnation. The unlawful word or deed is but the fruition of the evil which has taken root in the heart; the outward evidence that temptation has prevailed, and hell has triumphed. Says the apostle, "Every man is tempted [that is, enters into temptation] when he is drawn away of his own lust and enticed." God has provided the means by which we may resist temptation. These are the study of his word, and earnest prayer. In his encounters with the prince of darkness our Saviour prefaced every answer with the words, "It is written." It was the word of God that vanquished Satan. Those who make that word their study are arming themselves with weapons of divine power against the attacks of the foe. "Thy word," said the psalmist, "have I hid in mine heart, that I might not sin against thee." {ST, March 9, 1882 par. 10}

He is referring to someone who is already coveting (the word "lust" here is the same one used in Rom. 7:7 for "covetousness"), although they may not yet have committed the act.

What is the source of temptation within a person? How is that generated? Do unfallen beings have the same temptation? Is God's design defective? How could Christ have been tempted?

As I said in my post #153412 above, Ellen White speaks of outward temptation and inward sin as the sources of temptation. So there are internal and external sources. John speaks of the world, the flesh and the devil. The world and the devil are external sources, the flesh is an internal source.

Great! HOW does the flesh produce temptation?

The problem is not how the flesh produces temptation, but that it is not the only source of temptation.

How does flesh temp? Do you have an answer?

Through needs and desires, physical and mental/emotional, whether legitimate or not. For instance, a drug addict has an illegitimate need to use drugs.

OK - HOW are these physical and mental/emotional desires produced?

They can be innate or acquired.

R: "They can be innate or acquired."

HOW??? What is acquired? HOW are they innate?