Looking at the drill press and x-y table on hand, I would not do more than drilling holes in mild steel with it... the dogs and cogs are way too hard for that equipment. And achieving a correct angle and contact pattern on 6 mating surfaces on 2 round, centered parts, good luck.
I have looked into undercutting gears myself, but the required tooling and time makes the Cycle X offer ($289) looking pretty good.
Your hole saw idea might look good on paper, but it will shatter like nothing else, leaving you with a broken tool and a sub par surface quality, IF it cuts the gear at all, which I doubt. Have you ever cut a hole with a hole saw? Then you will know how much that tool moves around, even when it is angled perfectly square to the surface. Now cock that 1 degree, and watch what will happen... even on a super stiff mill.
I'm all for DIY, but this will not work.