I am working on my first ever project , and I have used some copyrighted images(images taken from some other well recognized games). Is it even possible that I edit the images a little bit and then use them as royalty free images?
The best thing to do here is to create something new "in the spirit of" the thing you're borrowing from. Do not copy graphics and just edit them in photoshop. You'd have to change them A LOT before it would be without legal risk. And it's also low rent. Be better than that.
Let me give you an example by looking at music for a second. If you pay attention you will see (hear) that tv shows will often use songs that sound similar to another song. I used to be an editor on reality tv shows. We had an arsenal of original music that was supplied to us by the producers. And the guy that created all that original music would often borrow heavily, or almost even parody, another song. If they need a spy theme he would make them a James Bond sounding thing with some of the notes changed. But you could definitely tell that it was supposed to sound like James Bond.
But here's the difference. He did not go in to a sound program, use the original recording and change the notes around. He completely re-recorded a new song that had a similar vibe and maybe shared some of the same notes. He might have listened to the original song, played it just like the original, and then figured out notes to change. But it was now original. Music is tricky because the rights for the tune (notes) and the arrangement or recording are two different things. It's best to get original music and a liberal license agreement.
For graphics. I once did a game where I needed graphics that looked like an old tin toy robot. I brought the robot graphics in to photoshop and then drew new graphics that looked very similar to what I was borrowing from. But in the end it was a completely new graphic. Wheels and pullies and gears of the robot were all in different places and different sizes. I didn't even trace it. But having them side by side helped me design something new in the spirit of the thing I was paying homage to. And if I get sued or get a take down notice, I have my source layered photoshop document that I can pull out and prove that I created it from scratch.
There are of course stock sites where you can get music and graphics. But even on those read the license and make sure that your usage falls within that allowed license. Very often on music sites the license they're selling you does not include usage in a game. I've seen stock graphics where the license was limited on the number of end users can get it. Look for "royalty free" licenses.
I often hire people to create graphics and it doesn't have to be expensive. $100 or even free sometimes.
My next game is going to have a really cool metal song for the main title. A friend has a band and he wanted to record something for me for free. Even then we'll sign a license agreement.
You can, but you'll need permission from the original copyright owner - there's no way around it, unless there's some license attached allowing you to do that specifically.
It doesn't matter whether you modify or edit the images (or any other copyrighted work).
Some legislations got special rules for such, e.g. it's possible that something is so obvious or simple that noone can claim any rights on it (for example a simple red dot without anything else).
But as with most legal questions, ask a lawyer. Some might even agree on helping you with simple/basic questions for free. Don't trust random internet people, because they might as well be the ones just waiting to sue you seconds later. ;)
No, of course you can't take somebody else's work, modify it "a little bit" and then release it as your own.
That you would even ask the question indicates that you're dangerously unaware of international intellectual property laws. You really need to bring yourself up to date on the very, very basics of Copyright and Trademark law (like, what they are, what they cover, and when they don't apply), before you accidentally do something that gets you into trouble and potentially fined or jailed for violating someone else's rights to their creations.