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Often times I will be playing a game with a freind and one of us will charge and kill so many models in assault that nothing is within 1 inch of the attacking unit at the end of the assault. What does this mean? We have been saying that this means the killzone is cleared and the CC ends because no one is within one inch anymore. Is this what is suppose to happen?

Pg. 44, "Pile-In Moves"

All you have to do in order to clear the kill zone is to get rid of all models in BtB with enemy models.

The killzone is defined as the area within 2" of a friendly model that is in BtB with an enemy model.

Any model in the kill zone is said to be engaged in the close combat.

If a model is not even partially in this zone then the model is locked in close combat but not engaged.

The kill zone is not defined at the start of the close combat phase but has to be recalculated in each initiative step, this gives high I armies a clear advantage in CC as intended as the kill zone can and usually will shrink after their kills are removed.

The fact that the kill zone is affected from I-step to I-step can also be used to reduce the usefullness of high power weapons such as powerfists as well as removing low I IC's from CC alltogether.

The most simple example is the removal of an IC with a powerfist from the CC.
As an IC counts as a unit on his own in CC he will have to be in BtB to actually be engaged, if the model/models that are engaged with him are also engaged with wichever unit he is fighting beside then by choosing thise models as casualties in early I-steps you can easilly change the IC state from engaged to locked, if you yourself have a better or equal I as that enemy unit you can even be more sinister by engaging the IC yourself with any models you choose that are engaged with him.

If you manage to kill off all models that are in the kill zone then that particular combat is over, determine the assault result as normal, looser checks moral as normal with any modifiers as normal.
If nither side breaks you move on to pile in moves.