<PAGE>

                                 EXHIBIT 10.17


                                       TO


                        Targeted Genetics Corporation's


                           Annual Report on Form 10-K



     "[ * ]" = Portions of this exhibit have been omitted based on a request for
confidential treatment filed with the Securities and Exchange Commission.  The
omitted material has been filed separately with the SEC.
<PAGE>

                                OPTION AGREEMENT

     THIS AGREEMENT is made this 31st day of August, 1999 between The University
of North Carolina at Chapel Hill (hereinafter referred to as "UNIVERSITY"), a
university having an office at CB #4105, 308 Bynum Hall, Chapel Hill, North
Carolina 27599-4105 and Targeted Genetics Corporation (hereinafter referred to
as "COMPANY"), a corporation incorporated under the laws of the State of
Washington and having an office at 1100 Olive Way, Suite 100, Seattle, WA 98181.

W I T N E S S E T H:

     WHEREAS, University is the owner of an invention, hereinafter defined,
relating to "rAAV Vectors" an invention by Dr. Christopher E. Walsh,
             -------------
(hereinafter referred to as "Inventor(s)")and identified as University File No.
OTD#00-06 (hereinafter referred to as "Invention"); and

     WHEREAS, Company wishes to obtain an option for a license under the Patent
Rights and University is willing to grant such option upon the terms and
conditions hereinafter set forth:

     NOW, THEREFORE, in consideration of the mutual promises hereinafter set
forth, the parties hereto do mutually agree as follows:

1.   Definitions

     As used in this Option Agreement, the following terms shall have the
     following meanings:

     (a) "Patent Rights" means any and all patents and applications for patents
     covering the Invention that are owned by University during the term of this
     Option Agreement, including all patents and reissue patents issuing on said
     patent applications and any divisionals, continuations, continuations-in-
     part, provisionals, substitutions, renewals, confirmations, supplementary
     protection certificates, registrations, reissues or continued prosecution
     applications.

     (b) "Option Exercise Period" means the period commencing on the Effective
     Date of this Option Agreement and expiring either [ * ] months after the
     expiration of the Sponsored Research Agreement, or [ * ], whichever is
     sooner.

     (c) "Effective Date" means the date first above written.

     (d) "Confidentiality Agreement" means the mutual Confidentiality Agreement
     entered into between University and Company which relates to the Invention
     and that was signed by University and Company and dated on 07/12/1999.
<PAGE>

     (e) "Territory" means the entire world.

2.   Disclosure and Evaluation

     (a) University shall provide Company with a copy of each U.S. and/or
     foreign Patent Application filed on the Invention during or before the
     Option Exercise Period.  Company shall, based upon such disclosure and/or
     any disclosure made in accordance with the Confidentiality Agreement,
     evaluate the technical, economic and commercial advantages of the
     Invention.

     (b) University shall also furnish to Company reasonable opportunity to
     confer with the Inventor(s) of the Invention.

     (c) The right to evaluate the Patent Rights and granted herein shall not
     include the right to sell or otherwise furnish to any third party the
     Invention, or any product made thereby, nor shall it include the right to
     disclose any product made thereby to any third party.

3.   Consideration

     (a) As consideration for the Option granted Company in Article 4 hereof,
     Company hereby agrees to pay to University all costs, including attorney's
     fees, associated with the preparation, filing, prosecution, issuance and
     maintenance of a U.S. Patent application on the Invention. Payment for such
     shall be due upon receipt of monthly billings from the University.

     (b) During the term of this Option Agreement, copies of all filings and
     drafts thereof shall be transmitted to Company by University's counsel
     simultaneously with the transmittal thereof to University.

     (c) As regards filing of foreign patent applications corresponding to the
     U.S. applications described in subparagraph (b), above, Company shall also
     reimburse University for the costs of such foreign patent filings.  If
     Company later decides not to reimburse University for the costs of such
     foreign patent filings, Company shall no longer have any rights to acquire
     a license to jurisdictions covered by such foreign patent filings and
     University shall be free to exclusively or nonexclusively license to third
     parties. Company shall designate that country or those countries, if any,
     in which it desires such corresponding patent application(s) to be filed.
     Company shall pay all costs and legal fees associated with the preparation,
     filing and maintenance of such designated foreign patent applications and
     such applications shall be in the University's name. University may elect
     to file corresponding patent applications in countries other than those
     designated by Company, but in that event University shall be responsible
     for all costs associated with such nondesignated filings. In such event,
     Company shall forfeit its rights

                                       2
<PAGE>

     under this license in the country(ies) not designated by Company where
     University exercises its option to file such corresponding patent
     applications. Company shall make the required designation(s) in good time
     prior to any bar dates to allow University time to exercise its option to
     make its own filings.

     (d) As further consideration for the granting of the Option, Company agrees
     to pay to the University, within 30 days of the Effective Date, the amount
     of [ * ] U.S. dollars.

     (e) Any amounts paid under this Article 3 shall not be refundable under any
     circumstances, nor shall such amounts be a credit against future royalties
     or other income related to the Invention.

4.   Option

     (a) Subject to the rights, if any, of the U.S. Government arising out of
     its sponsorship of the research leading to the Invention, University grants
     to Company and Company accepts, a non-transferable, exclusive Option to
     obtain an exclusive license under the Patent Rights in the territory. The
     Option may be exercised by Company at any time during the Option Exercise
     Period upon written notice to University. In the event that Company
     exercises the Option, the parties shall commence good faith negotiations
     forthwith regarding the terms of the license.

     (b) The Option Exercise Period may be extended if Company continues to
     sponsor research directly relating to the Invention for a time period and
     at an amount not less than the budget of the existing Sponsored Research
     Agreement between Company and University. Such option shall extend for an
     additional [ * ] months beyond the expiration of any subsequent Sponsored
     Research Agreements, however, in no event shall the Option Exercise period
     be greater than [ * ] years from the Effective Date of this Agreement ([ *
     ]).

     (c) If Company wishes to extend the Option Exercise Period without
     sponsoring additional research at the University in the Inventor's
     laboratory, it may do so at a cost of $[ * ] for each additional year,
     however, in no event shall the Option Exercise period be greater than [ * ]
     years from the Effective Date of this Agreement ([ * ]).

     (d) Any amounts paid under this Article 4 shall not be refundable under any
     circumstances, nor shall such amounts be a credit against future royalties
     or other income related to the Invention.

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<PAGE>

5.   Termination

     (a) If the Option granted by University pursuant to Article 4 hereof is not
     exercised by Company within the Option Exercise Period this Option
     Agreement shall terminate on [ * ] (or such other date as is consistent
     with any extension of the Option Exercise Period pursuant to Article 4 (b)
     hereof). If the Option granted by University pursuant to Article 4 hereof
     is exercised by Company within the Option Exercise Period and if University
     and Company have not negotiated and executed a license agreement within [ *
     ] days of the date Company notifies University that it intends to exercise
     this Option this Option Agreement shall terminate on the expiration of such
     [ * ]-day period, provided that such date may be extended by mutual consent
     of the parties in writing, such consent not to be unreasonably withheld by
     either party.

     (b) Company may terminate the Option Exercise Period at any time by
     notifying University in writing of its decision not to exercise said
     option. In such event, Company's obligations for reimbursement of patent
     expenses under Article 3 hereof shall terminate on the date University
     receives written notice of termination; however, Company shall be obligated
     to reimburse University for all patent application expenses incurred
     through the date of University's receipt of notice of termination, whether
     or not Company or University have been billed for such expenses as of said
     date.

     (c) In the event this Option Agreement expires or is terminated in
     accordance with the immediately preceding paragraphs, Company shall
     promptly return to University any and all patent applications filed or
     drafted pursuant to this Option Agreement, including any complete or
     partial copies thereof made by or on behalf of Company.

6.   Default

     If Company shall fail to perform or fulfill at the time and in the manner
     herein provided, any obligation or condition required to be performed or
     fulfilled by Company hereunder, and if Company shall fail to remedy such
     default within sixty (60) days after written notice thereof from
     University, University shall have the right to terminate this Option
     Agreement by written notice of termination to Company. Any termination of
     this Agreement pursuant to this Article 7 shall be in addition to, and
     shall not be exclusive of or prejudicial to, any other rights or remedies
     at law or in equity that University may have on account of the default of
     Company.

7.   Survival of Terms

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<PAGE>

     The provisions of Articles 11, 12, 13, 14, 15 and 17 shall survive the
     termination or expiration of this Option agreement.

8.   Governing Law

     This Agreement shall be construed as having been entered into in the State
     of North Carolina and shall be interpreted and its performance governed by
     the laws of said State.

9.   Severability

     In the event that a court of competent jurisdiction holds any provision of
     this Agreement to be invalid, such holding shall have no effect on the
     remaining provision of this Agreement, and they shall continue in full
     force and effect.

10.  Non-assignability

     Any assignment by Company of this Agreement or of any of the rights or
     licenses granted to it hereunder, without the written consent of
     University, shall be void; provided, however, that nothing contained herein
     shall restrict the transfer of this Agreement as a part of a merger or
     corporate acquisition to which Company may be a party.

11.  Notices

     It shall be a sufficient giving of any notice, request, report, statement,
     disclosure or other communication hereunder, if the party giving the same
     shall deposit it with the U.S. Postal Service, postage prepaid, addressed
     to the other party at its address hereinafter set forth or at such other
     address as the other party shall hereafter designate in writing:

     University of North Carolina at       Targeted Genetics Corporation
     Chapel Hill                           Ms. H. Stewart Parker
     Dr. Francis J. Meyer                  President and Chief Executive Officer
     Associate Vice Provost                1100 Olive Way, Suite 100
     Office of Technology Development      Seattle, WA 98101
     CB #4105, 308 Bynum Hall
     Chapel Hill, N.C.  27599-4105

12.  Indemnification

     Company agrees to indemnify University, its employees and officers and to
     hold such parties harmless from any action, claim, or liability, including
     without limitation

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<PAGE>

     liability for death, personal injury, and/or property damage, arising
     directly or indirectly from Company's possession, testing, screening,
     distribution or other use of Patent Rights provided under this Option
     Agreement, and/or from Company's publication or distribution of test
     reports, data, and other information relating to said items.

13.  Non-Commercial Use

     Company promises to allow use of Invention, Patent Rights only by its
     authorized personnel and only for the purpose of ascertaining its interest
     in pursuing licensing negotiations with University and will not employ same
     for any gain prior to exercising its option hereunder. Should Company
     market or in any way make or use Invention in a way other than as set forth
     herein, Company shall be liable to University in damages.

14.  University Use

     It is expressly agreed that, notwithstanding any provisions herein,
     University is free to use the results of the research performed during the
     Option Exercise period for its own research, public service, clinical,
     teaching and educational purposes without payment of royalties.
     Furthermore, University shall be free to publish University Technology,
     pursuant to Section 6 of  the Sponsored Research Agreement and during the
     Option Exercise Period, as it sees fit.

15.  Confidentiality

     Company agrees to accept information, samples and other disclosures
     hereunder on a confidential basis. The obligations of this article 15 shall
     survive and continue for three years after termination of this Agreement.
     Specifically excluded from such confidential treatment shall be: (a)
     information which, at the time of disclosure, was published, known
     publicly, or otherwise in the public domain; (b) information which, after
     disclosure, is published, becomes known publicly, or otherwise becomes part
     of the public domain through no fault of the Company or its affiliated
     companies; (c) information which the Company can establish was in its
     possession prior to the time of disclosure; or (d) information which, after
     disclosure, is made available to the Company in good faith by a third party
     under no obligation of confidentiality to the University.  The provisions
     of this article 15 shall not modify or supercede the rights and obligations
     of University or Company under the Confidentiality Agreement.

16.  Transfer

     It is expressly agreed that the University does not transfer by operation
     of this Option Agreement any rights it now has or hereafter acquires in the
     Invention.

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<PAGE>

17.  Use of University Name

     It is agreed that in no circumstances shall Company use the name of the
     University or its employees in any advertisement, press release, or
     publicity with reference to this Option Agreement, without prior written
     approval of the University.

18.  Data Sharing

     Company agrees that at the end of its evaluation hereunder, it will provide
     to the University a detailed, written scientific report including, but not
     limited to all data resulting from evaluation and all of its findings about
     the Invention.  University shall be free to use the results for its own
     research, educational and licensing purposes.  However, University shall
     not publish data provided by Company consistent with the Confidentiality
     Agreement.

                                       7
<PAGE>

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first written above.


UNIVERSITY OF NORTH CAROLINA          TARGETED GENETICS CORPORATION
AT CHAPEL HILL


BY:  /s/ Francis J. Meyer             BY: /s/ Michael T. Burke
     -----------------------              ------------------------
     Francis J. Meyer, Ph.D.              Michael T. Burke
     Associate Vice Provost,              Vice President,
     Technology Development               Corporate Development

     Date: September 2, 1999          Date: August 26, 1999
           -----------------                ----------------------


REVIEWED AND ACCEPTED:

/s/ Christopher E. Walsh
----------------------------
Christopher E. Walsh, MD
Principal Investigator

Date: August 2, 1999
      ----------------------

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