The exploding popularity of the newest generation of portable MP3 players, equipped with multiple gigabytes of memory and capable of displaying color video files, have generated a huge cottage industry to satisfy the growing demand of accessories for the players.

A. equipped with multiple gigabytes of memory and capable of displaying color video files, have generated a huge cottage industry to satisfy the growing demand of accessories for the players

B. equipped with multiple gigabytes of memory and capable of displaying color video files, has generated a huge cottage industry to satisfy the growing demand for accessories

C. being equipped with multiple gigabytes of memory and having the capability of displaying color video files, has generated a huge cottage industry to satisfy the growing demand for accessories for the players

D. equipped with multiple gigabytes of memory and with the capacity of displaying color video files, have generated a huge cottage industry to satisfy the growing demand of accessories

E. equipped with multiple gigabytes of memory and capable of displaying color video files, have generated a huge cottage industry to satisfy the growing demand for accessories.

Answer is B.

I think you are confused with Present participle and past participle.

Present participle = Verbing.
Past participle = third form of verb.

Present participle:

COMMA + VERBING: Modifies the entire preceding clause, and the verbing retains the subject of a verb.

They have helped the poor, giving food and cloths.

PAST PARTICIPLE: On the other hand, past participle is a NOUN modifier. It modifies NOUN near to it.

Built in 1990, the building looks nice.

The building, built in 1990, looks nice.

--> In both the case "past participle"-built-modifies the building.

Now, come to the question:

"Equipped with ..." modifies the nearest NOUN "MP3 players".

Thanks.

IMO, is the only one with the right sub-verb agreement.

The exploding popularity of ..., has generated..

Although, I feel like the noun reference is missing in the last part of the sentence. Ideally, the second part of the sentence should read "has generated a huge cottage industry to satisfy the growing demand for [the players'] accessories