What the CR is, is the average level of a party to take it on. A level one character could take on a single orc (in theory) with a moderate challenge, because the "party" is level 1 and the CR is also 1. A party of 5 characters should easily handle an orc. With a party of 5 characters at level 3, a creature with a CR 1 should be a relative pushover, meanwhile a creature with a CR of 3 should be easy due to numerical superiority, but still a challenge.
When you throw multiple creatures into a fight, the CR is generally done as follows:
A group of 3 orcs with individual CR's of 1 is a CR 4 encounter because you generally add 1 to the CR per creature. That's a CR 1 + 3(1) = 4. I don't rightly know the addition for creatures less than CR 1 (ie: .25) but it's the same general idea.
The spirit of this post is mostly right, but the math is wrong. The CR of a monster defeated is cross-referenced with average party level, and XP rewards are given out based on that, yes, but the proportions are different than as explained. In theory, two creatures with the same CR (or overall "level") would beat each other nearly to death one on one, but a party
of 4-5 characters of X level facing a single creature with CR X would only expend 20%-25% its resources and suffer 20%-25% losses.
Also, and this really only makes sense if you can view the XP chart that these numbers are being cross-referenced on, but the orc example above isn't quite right. The function suggested in the tabletop game is to add +2 to the encounter CR for every pair of monsters with a similar CR, and add together any remainder, NOT to just add 1 for every creature. So, with 3 orcs that are CR 1, you get CR 3 + CR 1, not necessarily CR 4. For a 1st level party, the XP reward for CR 4 is 1350, whereas the reward for CR 3 + CR 1 is only 1200. So, if you had 5 of those CR 1 orcs, it would be (CR 1 + CR 1 = CR 3) x2 + CR 1; (CR 3 + CR 3 = CR 5) + CR 1; CR 5 + CR 1 (total XP 2100 for a 1st lv party), not CR 6 (total XP 2700 for 1st lv party).
If you don't get it, don't worry. CR information probably doesn't help anyone playing ToEE, except to encourage you to enter deadly encounters early on in hopes of a greater XP reward (or more likely, die), and to dissuade higher-level characters from wasting time with low CR grunts (something that shouldn't be an issue in ToEE anyway as there is always a difficult challenge around the next bend). I just wanted to correct the meta-math in case anyone was using it somehow, which you would need the book's XP chart to do anyway.