The adrenal cortex is a critical steroidogenic endocrine tissue, generated at least in part from the coelomic epithelium of the urogenital ridge. Neither the intercellular signals that regulate cortical development and maintenance nor the lineage relationships within the adrenal are well defined. We have explored adrenal Shh activity and found that Shh is expressed in relatively undifferentiated steroidogenic cells, which signal to the overlying capsule and subjacent nonsteroidogenic mesenchyme cells that we also find are progenitors of steroidogenic lineages. Shh-expressing cells also generate all steroidogenic cell types, but not nonsteroidogenic ones. Shh mutant adrenals have a thin capsule and small cortex. Our findings both support a novel dual lineage, Shh-independent and Shh-dependent, model of adrenocortical development, and identify distinct populations of adrenocortical progenitor and candidate stem cells.