In your scenario you'd resolve it as follows:
Dragon has an encounter number of 2, while the Demon and Wraith both have an encounter number of 3. You always resolved cards in order of the lowest number first.
So... Dragon - Strength 7, has an encounter number of 2, it goes first.
If you lose to the dragon:
You lose 1 Life, and you would not encounter any other cards since you cannot encounter cards with higher encounter numbers until you successfully resolve the cards prior to it.
If it is a tie:
No damage. Dragon remains. You do not encounter the cards beneath because the card was not successfully resolved.
If you defeat the dragon:
You move onto fighting the Demon and the Wraith combined for a total of 15 Craft. If you win this combat, then you take both as a trophy. If you lose this combat you only take one combined Life loss from the battle.
Lets assume there were items under the creatures as well. Equipment has a higher encounter number, so you would have to defeat the strength and craft creatures before you could take the items.
Edited by chemical22, 02 June 2014 - 11:31 AM.