Get a bigger monitor. If you have this much extra budget, the smallest you should be getting away with is 23 inch.
The i7 thing is still debated, but for high end gaming, a Phenom II wins in most cases. For other purposes, the i7 is better. Get the phenom II. The i7 will add a lot to the budget and do basically nothing to gaming performance.
5850. The 5870 is overpriced for what you get. If you ever decide to overclock it, it completely owns everything out there as far as price/performance ratio.