I'm answering my own question because I found workaround for the missing elf.h file:
cd /Volumes/Android/WORKING_DIRECTORY/external/elfutils/libelf/
$ sudo cp -a elf.h /usr/include
With a copy of 'elf.h' file now in /usr/include the compilation goes on for a while, but then stops again with a different error:
arch/arm/mach-tegra/sleep.S: Assembler messages:
arch/arm/mach-tegra/sleep.S:240: Error: selected processor does not support ARM mode `smc #0'
make[1]: *** [arch/arm/mach-tegra/sleep.o] Error 1
make: *** [arch/arm/mach-tegra] Error 2
Not sure what to do about this last error though.
UPDATE: I gave up on trying to compile Android kernel directly under OS X. Instead, I installed 64-bit Ubuntu on VirtualBox and followed instructions found on this page:
http://forum.xda-developers.com/showthread.php?t=1774035
Except that as I said, I used VirtualBox and not VMWare Player as the above page suggested. It worked great and I didn't have any problems with networking and was able to ssh into Ubuntu to easily move compiled kernel back to OS X.
I also referred to this page to get the right kernel source for my device (grouper), prebuilt gcc and syntax for the make command (make tegra3_android_defconfig):
http://source.android.com/source/building-kernels.html
I hope this answer will save someone some time.