Our cactus is about 4 or 5 inches tall. I think it's looking unhealthy in the lower half. I also think it must receive a larger container. Recommendations? Thanks!
This looks like root rot to me. How much do you water it and when?
In terms of saving it, you may be able to take cuttings from them as advised in this question
If you do, be careful not to over water it, especially whilst it is rooting as the new roots are very susceptible to rot. Water a small amount and then leave it until the soil is completely dry.
Use a free draining soil mixed with plenty of grit and of course a pot that drains easily.